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China Briefings

Reports on China issued by Samsung Economic Research Institute

China Business Intelligence No. 166

China Business Intelligence No. 166

Samsung Economic Research Institute Beijing Office

July 21, 2010

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Highlights:

I. Economy

The foreign exchange concentration system, also known as the compulsory foreign exchange system, requires Chinese exports to sell off their retrieved overseas earnings to designated foreign exchange banks with the exception of government-approved foreign exchange accounts. The system is inappropriate under current economic conditions because it was created when foreign reserves were insufficient, whereas now, China' s foreign reserves hover above US$ 2.4 trillion, which is more than enough. Giving companies more control over foreign exchange helps alleviate the risk of investing in foreign exchange. The intention behind the reform is to give more authority to companies. The Chinese government will further raise the efficiency of its currency policy through more open ways of handling foreign exchange.

II. Industry

Foxconn' s wage increase is intended to not only improve labor-management relations, but also put pressure on rival companies to raise wages. Taiwanese companies were already burdened from a rise in production costs caused by the New Labor Contract Law and the recent movement aggravated their difficulties. As a result, Taiwanese companies, of which 80% are manufacturers, are forced to consider a strategic shift. They are seeking diverse options. Some are relocating production facilities to places with huge potential and low production cost. Others are transitioning to other industries. Ultimately, for mid-to-long term survival, they should pursue an upgrade or transition to another industry.

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