Looking at China's snowballing trade surplus since its exchange rate reform in July 2005, one might think the appreciation of the Chinese currency yuan, also known as Renminbi (RMB), had gone largely unnoticed by the country's exporters.

    Yin Mingshan, chairman of the Chongqing Lifan Group, China's largest private motorcycle manufacturer, noticed that pressure from the rising yuan never ceases to ease up. "The impact is tangible and costly," he says.

    The self-made entrepreneur who started from scratch 15 years ago earned 78 million yuan less from exports worth 318 million U.S. dollars after the RMB rose by 4 percent against the U.S. dollar at the end of last year.

    By August this year when the RMB had gained more than 9 percent accumulatively to reach 7.57 yuan to one U.S. dollar, five of the company's smaller Chinese rivals had folded. Lifan foresees motorcycle exports slowing from last year's 30 percent rise to 25.5 percent this year.

    Instead of complaining as the RMB strengthens, however, many Chinese enterprises, including Lifan, rise to the challenge and seek to check exchange rate risks through all available means, such as cost efficiencies and technological innovation.

    China's exports have grown to 546.7 billion U.S. dollars in the first half of this year, a rise of 27.6 percent from the same period last year, bringing the aggregate surplus to 112.5 billion U.S. dollars, up 83 percent.

    (Vietnamese workers at a wheel hub production line of the Lifan-Vietnam Motorcycle Manufacture in Hung Yen, Vietnam on July 6. After making its first overseas investment in 2002, China's  Chongqing Lifan Group has set up 11 subsidiaries in Vietnam and holds 70 percent of local motorcycle engine market share.)

    "We should give credit to our exporters, who bear the brunt of China's exchange rate reform as a stronger yuan squeezes their profitability and dampens their competitiveness in world markets," says Tan Yaling, a research analyst with the Bank of China.

    China scrapped the yuan peg to the U.S. dollar and linked it to a basket of currencies in July 2005 so as to allow the currency to float in line with market changes. But a daily floating band was imposed to ensure only a gradual appreciation.

    This encourages exporters to become more competitive through quality, brand reputation and technology. "If the RMB had gained 20 percent overnight, a legion of Chinese enterprises would have gone bust. Now we have time to adapt, upgrade our production and get stronger," Yin says.

    Yin's company has registered 3,807 patents at home and abroad, the most among all domestic automobile companies. Its flagship product, the Lifan 50-200ml Single Cylinder Gasoline Engine, and motorcycles were sold to more than 100 countries in South-East Asia, West Asia, Europe, Africa, and South America. It has also begun producing sedans.

    The sense of the urgent need for changes is prevalent among China's exporters, especially in such traditional sectors as textile. Yu Yimin, general manager of the Soho International Group, which deals in natural silk fabrics, says his company has developed an obsession with innovation, which it considers the only way to survive.

    "Importers would just say 'No way' and walk out on us if we hinted at a price hike as competition is fierce in China, but if we have something unique, then it strengthens our hand," Yu says.

    Based in east China's Jiangsu Province, the company has established its name for manufacturing rare male raw silk and is developing artificial skin from silk protein. Yu is confident that his company will be more competitive as the artificial skin – already in clinical use – will cost just one-tenth of similar products abroad.

    As the world's third biggest trade power expands rapidly after the United States and Germany, China hopes to polish the reputation of "Made in China", making it a mark of quality rather than cheapness. Processing trade requiring only simple assembly of imported raw materials, which boost the country's foreign trade takeoff in the 1980s, is no longer widely encouraged.

    Processing trade imports and exports totaled 440.9 billion U.S. dollars in the first half of 2007, a rise of 17.6 percent year on year. Meanwhile ordinary trade jumped 28.7 percent to 440.8 billion U.S. dollars, the first time it had equal shares with processing trade.

    Zhao Yumin, a research fellow with the Trade and Economic Cooperation Institute of the Ministry of Commerce, says only cost-efficient companies that constantly improve productivity have a chance of surviving fierce global competition and growing protectionism.

    The exact number of Chinese exporters is unknown, but Zhao says many of them still depend on the cost advantages of labor and raw materials as they lack the financial or technological capacity for innovation.

    While China-made clothes, shoes, toys, furniture and tyres flow into overseas markets, some foreigners are happy to have cheap goods, but others claim they suffer the effects of job losses. Foreign governments sometimes imposed stricter quality standards, which exporters sometimes struggled to meet, aggravating problems caused by currency appreciation.

    Turkey, for instance, imposed a customs deposit of 200-300 U.S. dollars on every imported motorcycle and electric bike since last August as Turkish foreign trade authorities launched a safeguard measure to investigate the damages inflicted by foreign manufacturers on local industries. China, the world's largest motorcycle exporter, however, was the only developing country targeted by the investigation.

    As China-made motorcycles are priced at only 400 U.S. dollars on average, the move immediately set back China's motorcycle exports. For instance, Taizhou, a port city in east China's Zhejiang Province, saw its motorcycle exports plummet from 166,000 units worth 75.71 million U.S. dollars over the first half of 2006 to 78 units worth 32,000 U.S. dollars in the first seven months of 2007, as figures from Hangzhou Customs revealed.

    The solution, Lifan figured, was to set up motorcycle plants in Turkey. "Will there still be trade friction? No. We're now part of Turkey's economic family and are well taken care of," says Yin Mingshan.

    Looking to the future, experts warn that the biggest menace to Chinese exporters is expectations of continued RMB appreciation that could trigger an influx of speculative funds so as to jeopardize the country's financial stability and wipe out profits of export-oriented manufacturers.

    A recent survey shows that three quarters of the 103 export companies polled by the China Business News had no idea of or had not used financial hedge tools to reduce exchange rate risks.

    Many small and medium-sized export-oriented enterprises are still used to adding an exchange clause in contracts or shortening collection period, the time period for which receivables are outstanding, to reduce exchange rate risks.

    Some larger ones have started to try forward foreign exchange trading, which require exporters to sign forward contracts with banks to sell or purchase foreign exchange on agreed date at agreed exchange rates.

    Another less used measure is RMB swap against foreign currencies, involving two transactions in opposite directions featuring domestic currency against foreign exchange between one company and one bank.

    "It's unrealistic to have exporters fight alone against a strengthening currency as the country's financial system is still embryonic and potentially vulnerable," says Tan Yaling.

    She says the government needs to extend currency elasticity and make the exchange rate formation more market-oriented by bringing in more market makers – banks and financial institutions that are obliged to quote both selling and buying prices through the interbank foreign exchange market.

    "The most important thing is that all participants in the interbank foreign exchange market should learn to perform in a professional way while the government should do more research to identify the real value and the equilibrium price of the RMB," she says.

    Ha Jiming, chief economist with the China International Capital Corporation predicts the value of the RMB will rise to 7.3 yuan against one U.S. dollar at the end of the year if the dollar maintains its performance. "It will take three to five years to ease the pressure for further appreciation of the RMB yuan," he says