China Exporters Suffer as Currency Rises

Dependent on exports to the United States, the Hebei Lihua Hat Co. saw its profits wiped out as China‘s currency rose steadily against the dollar over the past year.

Yet even those efforts might be inadequate, said Wang Zhenhao, the business manager for Hebei Lihua, located in Baoding, a city southwest of Beijing.

Chinese companies that supply U.S. retailers with billions of dollars worth of toys, furniture and other goods every year face a painful squeeze as the yuan rises, setting off a race to cut costs or find new products that Americans will pay more for.

Washington is pressing Beijing to let the yuan, also known as the renminbi, or people‘s money, rise faster. It says the yuan is undervalued, giving Chinese exporters an unfair price advantage and widening the U.S. trade deficit with China.

The yuan‘s rise is small compared with swings in the yen and the euro against the dollar in recent years. But it is jarring for Chinese exporters, whose profit margins are thin and whose only competitive edge is low prices. Unlike Japanese or European companies, they lack technology and brand names that might keep American customers loyal even as prices rise.

Zhao said the group wants members to invest in developing profitable brands by improving quality.

The pain should be concentrated in export industries, with little impact on U.S. consumers or China‘s broader economy, because Beijing is restraining the speed of the yuan‘s rise, said Andy Rothman, chief China strategist for investment bank CLSA Asia-Pacific Markets.

Beijing has given no sign it will slow the yuan‘s rise, despite the possible threat to employment at a time when the government needs to create jobs for a growing work force and millions of people laid off in the overhaul of state industry.

A more muscular yuan also helps the large segment of China‘s export industries that rely on foreign raw materials.

And some Chinese industries are enjoying a windfall.

Oil refiners are racking up fat profits on lower costs for imported crude. Airlines are seeing the cost of Boeing Co. and Airbus Industrie jetliners fall. Banks are richer as the value of their Chinese assets climbs in dollar terms. Companies that invest abroad are paying less for stocks and other assets.

But costs are rising for those that use Chinese materials.

The Anji Henglin Furniture Co. is paying more for wood, plastic and other materials, said Mei Yimin, the director of its foreign trade department. The company, in the southeastern province of Zhejiang, says it was China‘s 11th-biggest furniture exporter last year with sales of $26 million.

“It is even worse that the appreciation is taking place bit by bit, which makes it more difficult to negotiate with distributors,” Mei said. “If it happened by a big margin overnight, they would have no option but to share the loss.”

Galanz Group Co., which exported $700 million worth of microwave ovens and other appliances last year, renegotiated contracts with U.S. retailers, which agreed to share exchange rate losses, said Liu Guizhong, deputy general manager of Galanz‘s foreign trade unit.

“If they didn‘t agree, we would have shortened the contract from one year to half a year or three months to avoid the risk,” Liu said.

Beijing embarked on exchange-rate reform as part of a long-term effort to make its financial system more flexible. The government says it will eventually let the yuan trade freely on world markets and will end barriers to the movement of money in and out of the country.

The surge in export revenues has strained China‘s ability to contain inflation without letting the yuan rise. The central bank drains billions of dollars a month from the economy by selling bonds and has piled up reserves estimated to exceed $1 trillion.

A top Chinese economic official, Vice Premier Wu Yi, told visiting U.S. Treasury Secretary Henry Paulson in December that Beijing would continue exchange rate reforms but at its own pace.

Beijing is trying to reduce its dependence on low-profit exports by encouraging China‘s own consumers to spend more and prodding companies to invest in creating new technologies and brand names.

VTech Holdings Ltd., a Hong Kong company, has a work force of 20,000 in China making educational toys for sale in the United States.

It responded to the yuan‘s rise by boosting spending to develop new toys, said a manager in its finance department who would give only his surname, Yao.
“We are trying to lead the market,” Yao said, “so that we can sell at higher prices.”