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China factories go into overdrive but exporters are not happy


Clark Feng saw export orders for the garden furniture, swings and tents he sells out of China surge 70% last year as lockdowns and social distancing fueled demand. But he’s not happy about it.


“The more you sell, the more you lose money, what’s the point?,” said Feng, who owns trading company Vita Leisure Co. in the city of Linhai in eastern China. “I don’t know who says we are beneficiaries. We are victims!”


With annual revenue of around $5 million, Feng’s firm is one of the million or so small and medium-sized manufacturers and trading businesses that form the backbone of China’s exports. But while orders have flooded in as the Chinese economy recovered quickly from the effects of the virus, Feng and others are reeling from a jump in the yuan, rocketing shipping costs and labor shortages, which have slashed their already wafer-thin margins.


The consequences could be severe for China’s growth and add pressure to global inflation. With some factories now running at a loss, owners may have to raise prices, something they were reluctant to do before the virus, even as labor and land costs increased. They also have little incentive to expand capacity — investment the Chinese government needs for its plan to build a stronger domestic market.


China’s bounce-back from the virus has brought with it a host of problems for the nation’s manufacturers. Booming production has strained electricity supplies in some areas, forcing factories to buy their own generators. The global shipping industry is still in disarray because of the pandemic, with a shortage of containers causing delays and pushing up costs. And the supply of labor has been severely curtailed — China’s migrant worker population fell by more than 5 million last year following lockdowns in the first quarter.


“Factories were elbowing each other out for skilled workers,” said Feng, adding that wages for aluminum welders increased nearly threefold. “It’s hard to be a manager nowadays. We are at the workers’ mercy.”


But the real killer is the currency. China’s yuan, also called the renminbi, has gained more than 10% against the dollar since June, and now stands around 6.48. That has eaten into profits as the vast majority of exporters take payment in the greenback, but pay suppliers and staff in yuan. With a gap of up to three months between billing and payment, during which the value of the dollar declined, many exporters saw their profit vanish.


“I’m very worried,” said Feng, who is now selling some products at a loss and plans to raise prices this year. “I’m happy for my country to have a strong economy, but a strong renminbi is a disaster for exporters.”


Industrial profit growth tends to slow when the yuan appreciates by more than 6.5% year-on-year against the dollar, according to research by Standard Chartered Plc.


If exporters raise dollar prices in response to the yuan’s rise, that could hurt demand for their goods, but if they accept lower profits, they won’t have the money to invest in new capacity. A broad measure of investment by manufacturers in China declined more than 2% in 2020.


With Beijing attempting to curb real estate investment this year, it needs manufacturers to spend more to foster economic growth. To make matters worse, tax cuts given to small businesses in 2020 to help tide them through the virus are expected to expire in months.


One advantage exporters have is that, even if they raise prices, buyers may have no choice but to accept the increase because they have few alternatives.


“Other countries are still impacted by the pandemic, unlike China,” said Antony Hung, sales manager at Hangzhou-based Dicheng Technology Co. Ltd., which exports bathroom cabinets to Latin America, Southeast Asia and the Middle East. “The pandemic has a long-term positive effect on China because we demonstrate our reliability over competing countries like India.”


A stronger global economy in 2021 would support demand for Chinese goods. If that continues to widen China’s trade surplus the yuan would hold its gains or even appreciate, “and inflation would be passed on to the rest of the world,” according to analysts at Pantheon Macroeconomics. “The inflationary rebound in the next couple of years is likely to be sizeable.”


Even with the currency pressure, export growth is likely to remain strong alongside a vaccine rollout that should help to strengthen the world economy.


“Global demand recovery should more than outweigh the impact of a stronger currency,” said Qu Hongbin, chief China economist for HSBC Holdings Plc., who predicts Chinese exports will surge 7.9% in 2021 from last year.


What will take longer to recover are the problems in the global logistics industry, which exporters expect to last for most of 2021. Businesses can’t get their hands on containers fast enough and congestion is building at key ports around the world because of virus restrictions.


“Containers we exported are stuck everywhere in the world and cannot return in time because the pandemic is serious overseas and all procedures from clearing customs and logistics to storage are very inefficient,” said Mark Ma, owner of Seabay International Freight Forwarding Ltd., a company in Shenzhen that handles goods sold on platforms such as Amazon.com Inc.


Even though shipping costs are usually paid by importers, the chaos forced some Chinese factories to cut prices to stay competitive.


“Right now, shipping takes up more than 20% of the costs,” said Alex Li, a sales executive of a Hangzhou-based company that pivoted from beauty products to facemasks and testing kits in 2020.


And if all that isn’t enough to discourage China’s exporters from new investment, there’s the long-term specter of global politics.


At home, Beijing has signaled it wants to reduce reliance on exports as part of a “dual circulation” strategy, suggesting it will be reluctant to help low-tech exporters. Abroad, the trade war fueled by Donald Trump had a seismic effect on manufacturers’ confidence and appointees of new President Joe Biden have signaled they will take a more confrontational attitude to Beijing compared to the Obama administration.


“You don’t know how international policies will shift,” said Dicheng’s Hung, whose firm plans to transition away from manufacturing. “After the crazy Trump, we learned that overseas policies can change in an instant.”


Meanwhile, Hung faces a more immediate crisis that affects all China’s industry — the annual holiday for the Chinese New Year, when workers traditionally return to their hometowns. With new outbreaks of Covid-19 in parts of the country, factory owners are worried that workers may be unwilling or unable to return after the holiday, causing delays in fulfilling orders that would be disastrous if the yuan keeps falling.


“If workers get locked down in their regions, they will only return much later,” said Hung, whose company has decided to hire temporary workers from other factories over the break at a higher rate and put them up in hotels in order to keep production lines going.


“The temporary workers are more expensive, but if we can send the goods out in advance, and we don’t suffer from currency losses, we are already making more money,” he said. “We are racing against the exchange rate.”


(With assistance from Matt Turner, Kevin Varley and Adrian Leung)

China factories go into overdrive but exporters are not happy China factories go into overdrive but exporters are not happy Reviewed by TechCO on 1/27/2021 Rating: 5

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