Export challenge
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China's decision to make its currency flexible means exporters may suffer as a stronger yuan drives up the prices of their products.
However, if the expected appreciation of the Chinese currency can push them to move up the value chain rapidly, the exercise can turn out to be a boon for Chinese exporters in the long run.
The gradual and controlled manner in which China is likely to press ahead with the reform of its exchange rate regime signals that there will be no big, immediate impact on the bottom lines of most Chinese companies.
But any rise of the yuan against the US dollar, no matter how small or how slow, will eventually dent the profit margins of Chinese exporters.
This is certainly bad news for manufacturers accustomed to realizing razor-thin profits from cheap exports.
The uncertain nature of global economic recovery has already stopped most Chinese exporters from raising prices even as rising domestic labor cost is forcing them to do their utmost to improve productivity that will offset the pay hikes.
A stronger yuan will only make it more difficult for some Chinese exporters to survive based on current business models.
Yet, a stronger yuan that reflects the growing productivity of the Chinese economy can be a litmus test of the real competitiveness of the country's export engine.
China became the global export champ last year, so it no longer needs to rely on low-cost exports for economic growth.
Understandably, it is not easy for Chinese exporters to climb up the value chain. Chinese policymakers too have tread with caution, as they believe, rightly, that exporters face difficulties in adapting to weak global demand, higher labor costs and a stronger yuan.
Nevertheless, if their success over the past decades is any indication, it will only be a matter of time before Chinese exporters prove their competence by moving up the value chain and pioneering the ongoing transformation of the country's growth model.
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