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Yuan Strengthening to Have Impact on Semi Industry

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With the decision by the Chinese government to loosen the yuan's peg to the US dollar, the yuan rose slightly during trading on the first day of the new foreign-exchange (forex) rate.  This is the trajectory that is expected, slow and steady gains.  There are controls in place by the Chinese government to ensure that market shocks do not occur as a result of the loosening of the yuan against the dollar.

 

The immediate effects were that markets were up for a while, particularly in the US, in part because there are expectations that this exchange rate change will open the Chinese market more to international imports (e.g., US and EU goods), as those goods become cheaper imports to China's growing middle class thanks to a stronger yuan.  Conversely, there will be the increases in cost of importing and/or purchasing Chinese goods, particularly consumer electronics (CE) for the semiconductor industry and its end markets.

 

There is little short-term effect expected, which is a good thing in 2010 markets still jittery after the recent global recession.

Looking ahead to next year, what is generally forecasted is two-fold for the semiconductor industry:

  1. The migration of manufacturing out of China for lower valued CE (especially toys and disposable CE) is likely to gain in momentum due to increased costs from a stronger yuan (cf. the upcoming MarketWatch Quarterly in July for a review of SE Asia); and
  2. The stalling in watershed decreases of pricing for CE (i.e., there will be price reduction deceleration along the supply chain to offset the increase in manufacturing costs due to exchange rates with strengthening yuan.  The thin margins along the CE supply chain will have to be passed along throughout the chain, ending with the consumer seeing less dramatic and longe times between more shallow price drops on devices, toys and other CE).

Lisa Ann Cairns, Ph.D.
Written on Tuesday, 22 June 2010 10:07 by Lisa Ann Cairns, Ph.D.

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