Exhibitors at China's largest trade fair may have one more question to ask when their paper-thin profits are further squeezed by a fast-rising yuan.

"Are you willing to pay by euro?" Lu Jia, a sales manager from a local leather manufacturer at the Canton fair, ventured the final but most crucial question to her Turkish client after introducing her products.

"Honestly, starting clearing of euro transactions rather than the US dollar is not easy for my company, but it is still worth a try given a faster yuan rise this year," the 23 year-old Lu said at the trade-promotion event in Guangzhou, capital of the southern Guangdong Province.

The Chinese currency, the yuan, breached the 7-yuan mark for the first time on April 10, gaining 4.47 percent this year and 18.27 percent since the government unpegged it from the dollar in 2005.

"The yuan appreciation far outpaced our business growth. Its weekly increases were even beyond our anticipation," said Cao Xiaojian, the Jiangsu Shuntian Co., Ltd vice chairman.

Like most other Chinese exporters, Cao earns dollar-denominated profits, which are on the decline as the dollar becomes cheaper. He said that a 1 percent rise in the yuan would result in a sales profit decrease of 2 percent to 6 percent and things were even worse for the garment industry.

"Profit margins for home electrical appliances are between 3 percent and 5 percent and the rising exchange rate has eaten them away," said Zhang Yujing, China Chamber of Commerce for Import and Export of Machinery and Electronic Products vice chairman.

Most exhibitors at the fair had to raise their offers due to higher costs in raw materials, energy and transport. Yet, they were afraid too high prices might scare away orders faced with sagging demand due to a global slowdown.

"A small rise in offers is acceptable," said Khaldoun Kalbouneh, general manager of the Furniture World, a trading company headquartered in Palestine. "But if the prices are too high, I may consider other markets."

Zhang said export-oriented sectors should improve their product mix, add more value and use financial tools to evade risks by the yuan rise.

As China's largest listed textile manufacturer, the Jiangsu Shuntian has pulled investment from textile into other industries like chemical, finance and securities, mines and high-tech, among others.

But many other companies prefer price increases. Chinese leading home appliance maker Qingdao Haier said it would re-set its prices with overseas sellers once the yuan gained more than 3 percent. The new price would be determined by the specific foreign exchange rate.

Feng Bin, Suzhou Chunlan Air Conditioner Co., Ltd general manager, said he hoped to transact via the euro. "The offer will expire in three months if the client sticks to the dollar. The exchange rate changes too quickly."

Experts say the change of currency clearing system is still not feasible for most exporters as it involves adjustment of export markets and bargain with foreign buyers. Besides, such services in domestic banks are too complicated, they say.

Therefore, some companies are considering financial derivatives as a way out. Shen Zhiming, Zhejiang Cathaya International Co., Ltd manager, said his company had bought currency futures for two years. "It is a real learning process for Chinese enterprises, a process for internationalization."

The China Import and Export Fair has two phases, from April 15 to 20 and April 25 to 30. The first phase features textiles, garments, health products, household appliances, tools, small vehicles and hardware.

Food, tea, kitchenware, decorations, toys, sporting goods and office supplies highlights the second phase.

(Xinhua News Agency April 19, 2008)