Learn Chinese: Chinesepod - China economy fueChinesepod - Rising yuan pushes China upmarketled by investment, may prompt curbs

CHINA / Foreign Media on China

China economy fueled by investment, may prompt curbs
(Bloomberg)
Updated: 2006-04-20 13:42

China's government said a su

CHINA / Foreign Media on China

Rising yuan pushes China upmarket
By Chang W. Lee (The New York Times)
Updated: 2006-04-20 14:12

If the United States persuades China to push up the value of its
currency, there could be some unintended consequences: imports of $300
shoes and computer-controlled machine tools from China instead of
T-shirts and plastic toys.

In the short run, a stronger currency may encourage China to buy more
General Electric turbines and Microsoft computer programs from the United
States. That is why officials in Washington have pushed China for several
years to allow the currency, the yuan, to rise sharply in value. The
topic is likely to be near the top of the agenda when President Hu Jintao
of China meets President Bush in Washington on Thursday.

A currency appreciation would make Chinese exports more expensive in
foreign markets and foreign goods more competitive in China.

The yuan has risen against the dollar by 3.3 percent since July, and
already there are side effects: businesses across China are concluding
that their survival may depend on following Japanese and South Korean
companies up the economic ladder as quickly as possible, selling more
advanced products with fatter profit margins.

As a result, China is gradually moving from competing with countries like
Thailand and Indonesia to vying with South Korea, southern Europe and
eventually, with the likes of Germany, Japan and the United States.

The Hunan Huasheng Industrial and Trading Company, a 15,000-employee
manufacturer in central China that produces shirts, pants and skirts made
from linen and ramie, has invested in better sewing and cutting
equipment. Higher quality has allowed it to shift from supplying Wal-Mart
to manufacturing for Gap, Perry Ellis and Liz Claiborne, said Jeff Mo,
Hunan Huasheng's vice president. "We are competing with the Koreans," he
said.

Guangzhou Light Holdings Footwear, a large maker of shoes from synthetic
material, is stepping up the quality and output of its genuine leather
shoes. "Our future competitors will be the Italians because they occupy
the high-class market," said Leo Cheng, the company's deputy general
manager.

Guangdong New Zhong Yuan Ceramics in a nearby city, Foshan, has started
advertising its most expensive ceramic tiles around the world in
competition with Spanish and Italian products. Making less expensive
tiles has become less attractive, partly because the yuan has risen, but
also because wage increases have been running at 10 percent a year.
"That's why we're switching to higher-value-added products," said Stephen
Huo, the general manager of its export department. "If we stuck to the
low-end products, we won't make profits."

The biggest industry, automaking, is preparing for a similar shift. Until
the last year, China mainly exported extremely cheap cars, costing under
$5,000 apiece, to Africa and the Middle East, especially Syria.

But last summer, Honda started sending compact cars to Europe from a
factory on the outskirts of Guangzhou, while a range of Chinese companies
including Chery, Geely, Lifan and Shanghai Automotive are preparing to
start shipments to the United States and Europe in the next two years.

While the shift toward more valuable products poses a competitive
challenge to industrial nations, it may help start to solve another
American issue that is likely to be a priority during President Hu's
visit: the protection of copyrights, patents and other intellectual
property. Chinese companies may want to protect the valuable brands and
designs they are developing themselves.

Hunan Huasheng used to overproduce when it received orders for brand-name
merchandise from Western companies and sell the extra shirts and other
garments locally. But the company increasingly appreciates the power of a
brand name in commanding clothing prices well above the cost of
production. It has stopped overproducing and does not even add brand
labels to many garments at the factory.

Instead, Hunan Huasheng arranges for them to be sewn on later to reduce
the risk that the garments will be misappropriated before they leave the
country, Mr. Mo said.

Guangdong New Zhong Yuan Ceramics is registering its tile designs with
foreign governments. "When we have a new product, we apply for a patent
before we produce it," Mr. Huo said.

American officials have lately been talking less about currency values
and more about intellectual property. But in China, the value of the
currency remains a bigger concern, and President Hu called again on
Wednesday for a "basically stable" currency.

China revalued the yuan by 2.1 percent on July 21, and has allowed it to
appreciate by a further 1.2 percent since then, a pace of change that
critics describe as glacial. But even this much has affected industries
with already slender profit margins, like garment manufacturing, in which
a few big Western retailers like Wal-Mart can play off companies and
countries against each other to find the best price.

"We are in despair" because of the yuan's appreciation, said Sherman
Wang, general manager of the Hangzhou Kailai Neckwear and Apparel
Company, in an interview on Wednesday at the Canton Fair, a big trade
exposition that attracts businesses from across China. "It's difficult
for us to raise prices."

Many experts contend that higher wages would force China to move toward
higher-priced goods, even if the yuan did not gain value. Indeed, that
may already be happening, if only gradually. At Hunan Huasheng, Mr. Mo
said that wages in Changsha, an inland city in central China where Hunan
Huasheng is based, were climbing 15 percent a year although only now
reaching $100 a month for factory workers.

"They're going to go to higher-end goods whether they revalue or not,"
said Peter Morici, a business professor at the University of Maryland.

And if the yuan did not rise, then Chinese exporters would have even more
profits to invest in developing high-end goods, Mr. Morici added.

But many executives say the appreciation of the currency, and especially
the uncertainty over how much further the yuan will climb, seems to be
giving this shift an extra push.

Of course, Chinese companies that raise prices and lose sales in response
to an appreciating yuan could eventually help close the American trade
deficit with China. The United States currently imports six times as much
from China as it exports there. Economists say that a nation's overall
trade balance is more important than any single deficit or surplus with
an individual country.

China ran a global surplus of $23.18 billion in the first quarter of this
year, up from $16.48 billion in the quarter a year earlier. In contrast,
the United States ran an overall trade deficit of $134.33 billion for
January and February combined and has not yet released data for March.

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