I saw two interesting pieces last week on the rise of the yuan. One said that the appreciation of the Chinese currency was hurting small businesses in China and increasing the mortality rate among small business start-ups (something VC people should be interested in). The other said, basically, that that was what needed to happen.

The first story, Chinese exporters struggle with rising yuan, was a Reuters piece published in the International Herald Tribune. According to Reuters, the Chinese currency has appreciated 4.5 percent against the US dollar in the last four months. They calculate that to be the equivalent of about 15% a year at the moment. But they admit that most analysts expect the 2008 total appreciation of the yuan to be between 8.5 percent and 10 percent - compared with 6.9 percent in 2007 and 3.4 percent in 2006.

In other words, the yuan renminbi is getting significantly stronger.

One impact of a stronger yuan has been reduced profits for export-oriented businesses, according to the Reuters piece.






Reuters interviewed a few people and put faces to the data. And they looked in some depth at the situation in Wenzhou, a center for private-sector start-ups in Zhejiang Province. In 2006, according to the source Reuters interviewed, four out of five new export-oriented start-ups in Wenzhou survived their first year of business. Now that's down to about half - and the blame is being placed on the stronger yuan which makes Chinese exports more expensive in other countries.

Wenzhou, the article says, has 300,000 of those small businesses. They manufacture low profit, labor intensive products for export. And when those businesses fail, unemployment is the result.

The article looks at other problems such businesses face, like new tax laws and new labor laws; but the exchange rate gets most of the blame.

One of the ironies in the article is an admission at the end of the piece. The export industry in China will probably only grow by 20 percent in 2008, compared to about 27 percent over the last couple of years. A 20% growth rate for exports made the woe is me tone of the article seem out of place, especially when they go on to admit that the US economic slowdown plays a role in the reduction in growth, too. It's not all the fault of the strengthening yuan.

Which brings us to the second piece: The Agence France Press (AFP) published an article on what European Union Trade Commissioner Peter Mandelson thinks of the stronger yuan: China should revalue yuan to avoid overheating: Mandelson.

Mandelson said this about the yuan: "China's interest clearly lies in a gradual revaluation that takes some of the excess heat out of the export sector and strengthens consumer purchasing power." While the AFP picked up the story, it was part of an opinion piece originally published in the China Daily.

Of course, Mandelson wants the Chinese consumer to be allowed to by more European goods with that increased purchasing power. Like American lawmakers, Mandelson and the EU want China to open its markets, not just cut exports.

Politics aside though, the interesting part to me of the two stories is simple. The rising yuan seems to be having an impact on what kind of businesses make it. And that's an important piece of context for investment decisions...