The free float of the Chinese yuan/renmimbi is expected to have less of an impact on the cost of sporting goods imported into Europe than local inflation, the rising cost of raw materials and the recent devaluation of the euro. While the gross margins on most sporting goods products are higher than in some other sectors, some price increases seem to be inevitable.
Bowing to pressure from its major trading partners, the Chinese government announced on Saturday June 19, shortly before the G20 meeting held this past weekend in Toronto, that it would stop pegging the value of the yuan to the U.S. dollar, as it has done over the last two years. However, Chinese government officials hastened to add that this does not necessarily mean an appreciation of the yuan in the foreseeable future.
Floating against a basket of currencies like before 2008, the yuan may even go through periods of depreciation against the dollar, Chinese officials said, stressing than its appreciation was not in China’s interests. Immediately after the announcement, the yuan recorded an increase of 0.44 percent against the dollar to 6.797 RMB, but economists don’t see it appreciating by more than 3 to 5 percent per year in the foreseeable future. In the three years before its coupling with the dollar, it rose by 21 percent.
A higher value of the renminbi would escalate the cost of sourcing products from China, especially for European companies, which have seen the value of the euro decline by almost 20 percent against the U.S. dollar in recent months, although it recovered slightly in the last few days. European sourcing managers, who are still covered by dollar futures for the next few months, indicate that they are getting strong pressure from Chinese manufacturers to jack up their purchase prices in view of rising labor costs and higher commodity prices, coupled with higher freight costs. The smaller companies are also having trouble securing shipments on time.
While they are suffering less than European companies from the higher cost of sourcing from China, some American companies with strong brands have been able to pass on some price increases lately to U.S. retailers as they are coming out of the worst economic crisis in decades.
Wolverine World Wide has already raised prices in the U.S. but has not yet found resistance from retailers, according to the group’s management, which told a recent investors’ conference that it sees sourcing costs rising by low- to mid-single digits in the second half of this year and by mid- to high-single digits in 2011.
The recent labor unrest in China and Bangladesh suggests that there will be more sourcing issues in the future in all the sectors. One of the biggest traders, Li & Fung, told a Reuters conference a few days ago that the low-cost era in China is over, but its president, Bruce Rockowitz, said that 50 percent of its production will still be based in the country in the years ahead. The construction of high-speed railway links and other infrastructural work should allow Li & Fung to source more products from the interior regions.
Li & Fung expects to source $8 billion worth of products from China this year, and another $1 billion from Vietnam. Rockowitz said sourcing from Bangladesh, Indonesia and Vietnam will grow dramatically in the next few years, while structural problems will prevent India from becoming as significant a source as China.