Summary:
Manufacturers in China are seeing their profits dwindle. Raw materials and energy are more expensive, the yuan has strengthened almost 20% against the dollar, and there is tougher protection for workers and the environment as the government tries to make the economic growth more sustainable. Price of Chinese goods in US have surged 4.6% in May from the previous year. Manufacturers of low-cost products, which have been a key engine of China's economic miracle, are hardest hit. Growing realization in China that the country has relied too much on cost-cutting and simple production models to boost exports. China entering a more mature phase in its economic development? Will nevertheless remain an export powerhouse for many years, as the country also supplies industrial machinery and other higher-value products (less vulnerable to factors such as rising wages), and possesses infrastructure that few other developing countries can match. (Published: 30/06/08)
Notes:
- Manufacturers in China say their profits have dwindled
- they pay out more for raw materials and energy
- China's strengthening currency has made products more expensive for important markets such as the U.S.
- In July 2005, China bowed to pressure from global trading partners to ease its rigid grip on the yuan's exchange rate
- currency had been effectively pegged to the dollar for a decade, despite China's bulging trade surplus
- had created stability for exporters and their foreign buyers
- but: also angered Western critics who felt it gave Chinese factories an unfair advantage by keeping their prices low in dollar terms
- yuan's appreciation was slow at first, but last year it accelerated
- currency has now risen 20% in value against the dollar
- yuan has been losing value against the euro, on the other hand, making Chinese goods more affordable in Europe
- but: the advantage hasn't been enough for many manufacturers to offset other difficulties.
- price of Chinese goods in US surged a record 4.6% in May from the previous year
- Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.
- government's tougher protection for workers and the environment has also made it more expensive to do business
- part of Beijing's plans to support economic growth that is sustainable and modern, not merely fast.
- introduced this year: labor law that capped factory overtime, limited temporary employment and raised the minimum working age two years, to 18
- blow to small operations that traditionally hired and fired with each production cycle
- environmental oversight tightened: dyeing companies must now pay to dispose of the chemicals they use, instead of dumping them into the creeks that run through town
- Foreign buyers say tighter visa policies have made it harder for them to visit Chinese factories or attend trade shows
- none have been hit harder than the companies that feed the vast global appetite for inexpensive goods such as toys, household goods, shoes and clothes
- manufacturers of low-cost products have been a key engine of China's economic miracle
- helping to turn the country into the world's No. 2 exporter after Germany
- for years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition
- as material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs.
- many manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months
- While painful, such difficulties could usher in a more mature phase of China's economic development.
- e.g. country's sweater industry, like many others, is arguably overbuilt
- In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency.
- They say companies will also be forced to innovate so they can compete on factors other than price.
- Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports
- high dependence on foreign trade is not good for China
- for the U.S. and Japan, trade is equivalent to around 20% the value of gross domestic product.
- For China, it is about 75% of GDP.
- However: China is sure to remain an export powerhouse for many years.
- Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.
- Plus, the country's roads and ports, and its spectrum of suppliers and businesses that support manufacturers, are a draw that few other developing countries can match.
- China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China
- survey late last year by the American Chamber of Commerce in Shanghai and consulting firm Booz Allen Hamilton:
- 83% of the responding companies said they planned to keep their production in China.
- But: with rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries
