By  on April 8, 2010

BEIJING — An imminent shift in China’s currency policy might be good news for Sino-American trade relations, but the likely rise of the yuan looms over Chinese textile producers like a dark cloud, threatening to narrow their already thin profit margins and damage the manufacturing sector’s nascent recovery.

Among thousands of company representatives at last week’s Intertextile trade fair in Beijing, several factory bosses and sales managers discussed how the likely rise of China’s yuan will cut into their recovering businesses by driving up the cost of China-made products for U.S. and European buyers. Higher costs could make Chinese textiles less competitive on the global market. The currency pressure comes as China-based fabric and apparel producers face rising raw materials costs and intense pressure to increase wages to lure workers in the face of a labor shortage.

Speculation has heated up in recent days and weeks that China is preparing to let the yuan rise after holding the currency firm at about 6.3 per dollar since the global financial crisis took hold in the second half of 2008. Chinese leaders have said the currency policy helped the country, and the world, emerge from the crisis. Textile producers aren’t ready for a sudden shift.

The U.S. Treasury Department delayed a crucial report that could have labeled China a “currency manipulator” and the Obama administration said it expects China to act on its own. Treasury Secretary Timothy Geithner is set to land in Beijing today to discuss the situation with Chinese officials.

“An increase in the yuan is good for the country, but it’s bad for our business,” said Linda Chen, a saleswoman for Masculine Fashions, a Zhejiang province-based men’s wear production company that focuses heavily on exports to the U.S. “If the yuan increases, we’ll have to raise our prices and possibly lose a lot of business.”

In essence, by holding the yuan steady with the dollar for nearly two years to help withstand the global economic downturn, China has rolled back the clock for manufacturers who weathered the country’s sudden end to a strict U.S. dollar peg nearly five years ago. For three years, a gradual rise in the yuan became normal and businesses operated accordingly, building the potential for change into their prices and sales.

Karen Lee of the Shaoxing Dynamic Textile Co. noted her factory already has orders outstanding that could be affected by a change in the yuan’s rate. A sudden shift would cost money on pending shipments.

“We’re very worried about the value of the yuan increase,” said Lee. “The market is improving, but this is a big concern.”

While the chorus of speculation grows, manufacturers are doing what they can to protect their businesses. Some have switched to setting prices in dollars, which offers some limited protection against exchange-rate fluctuations on pending orders. Others say a stronger focus on high-quality items will buffer them because price isn’t the key concern for buyers seeking quality.

“Our prices are already a little high, so we’re not worried about the currency too much,” said Zhu Feng, international trade manager for a family-owned Wuxi wool producer. “The orders for this year are already coming in faster than we can keep up.”

Producers and buyers at Intertextile Beijing Apparel Fabrics, one of China’s main textile trade fairs, spoke with optimism about the coming year, despite pressures on the yuan. Many said they had fully recovered from the massive hit they took when exports dried up during the crisis, and that the domestic market is beginning to boom, adding to growing orders from the U.S. and Europe. This year’s fair featured more than 1,100 exhibitors, 10 percent more than last year, and drew more than 24,000 visitors, 88 percent of whom came from China. Buyers said the fair gave positive indications about China’s textile industry, while manufacturers said they were hopeful, but still a bit uncertain because of the currency question.

“For us, it’s just not good news,” said Ross Shen, sales manager for Linglong Textiles, based outside Shanghai. “If the currency value rises, we will lose customers.”

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