Thu, Jun 14, 2012 page9

• China exporting its way out of a slump

  China’s labor costs are rising rapidly, but its exports remain competitive because of investments in machinery and improvements in efficiency

  • By Keith Bradsher / NY Times News Service, GUANGZHOU, CHINA
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  With China’s domestic economy stumbling badly this spring as construction and retail sales slow, the country is unleashing a fresh surge of exports that is preserving millions of jobs in Chinese factories, but could fan trade tensions with the West.

  China’s General Administration of Customs announced on Sunday that exports last month surged 15.3 percent from a year earlier, twice as fast as economists had expected and vaulting past last December as the biggest month ever for Chinese exports. China’s trade surplus has expanded in each of the past three months.

  As indebted European economies slip into recession and unemployment inches back up in the US, Chinese factories are outcompeting rivals in developing countries and the West to claim larger market shares even as global demand is barely rising.

  

  Illustration: Mountain People

  “Our sales have picked up significantly and we’re now overbooked,” said Roger Lee, chief executive of the Hong Kong-based TAL Group, one of the biggest suppliers of high-end dress shirts to department stores and luxury brands in the US.

  China’s renewed success relies heavily on the US market, with Chinese exports to the US soaring 23 percent last month from a year earlier, data showed. Chinese exports to the EU rose only 3.2 percent.

  However, resurgent Chinese exports also have the potential to become a political issue in the US elections in November. Mitt Romney, who has clinched the Republican nomination for president, has already promised in campaign ads to stand up to China more vigorously on currency issues. US President Barack Obama has set up an interagency group to investigate trade law violations, particularly by China.

  Underpinning China’s export success is a combination of long-term investments in automation and short-term depreciation of the currency.

  Manufacturers across China are investing in labor-saving equipment, reorganizing shop floor management and taking other measures to control labor costs, which have been rising steeply as the country grows in prosperity.

  For example, in southern China, a manufacturer of home saunas has installed a US$25,000 computer-controlled drill that does the work of up to eight people. A garment company in Wenxi, in eastern China, is purchasing machinery to manufacture buttons more cheaply. And a printer in Wuhan, in central China, is fully automating paper cutting and plans further investments in printing and binding, so that workers will only be required to package the finished product.

  “We are investing in additional machinery so as to improve productivity,” said Jessica Meng, the sales director at the printer, Maxleaf Stationery. “Labor costs are too high these days.”

  The move to automation, consistent across many industries, is a central reason that Chinese imports in the US are becoming cheaper. Data from the US Bureau of Labor Statistics show that average prices for goods imported from China edged down in April for the first time in almost two years, despite double-digit increases in labor costs.

  Rising Chinese labor costs have not yet meant relief for China’s rivals in other developing countries, Japan and the West, partly because automation is offsetting an erosion in Chinese competitiveness.

  Beijing officials have strongly endorsed stepped-up equipment investments by exporters. Labor shortages in export zones have meant that workers have not tended to protest the introduction of more machinery.

  As the domestic Chinese economy slows, the government is also counteracting some of the pain by taking currency actions to help exporters. The Chinese government allowed the country’s tightly managed currency, the yuan, to fall nearly 1 percent against the US dollar last month, its largest drop since Beijing officials unpegged the currency from the US dollar in July 2005.

  A weaker yuan makes Chinese goods less expensive in foreign markets and makes imports less affordable in China.

  The competitive advantage for Chinese exporters is amplified by a fundamental shift in inflation. For years, producer prices in China were rising faster than producer prices in the US. As a result, the inflation-adjusted exchange rate of the yuan to the US dollar was rising even faster — it was up 40 percent since 2005, according to a US Treasury report last month.

  However, producer prices in China have been falling this year. They were down 1.7 percent last month from a year earlier, as the popping of China’s real-estate bubble over the past year depressed demand for steel, cement and other materials. Producer prices have kept rising in the US, so the inflation-adjusted exchange rate has moved about 2 percent in favor of China’s exporters this year.

  At the same time, weakness in China’s domestic economy has resulted in more workers seeking jobs in export factories.

  “It is easier to find workers this year, much easier,” said James Jian, general manager of Hongyuan Furniture, a 200-employee manufacturer of home saunas that use infrared lights instead of hot rocks.

  Demand for the saunas, which cost US$1,500 to US$4,000, is particularly strong from affluent households in the US, he added.

  Chinese officials have also urged the country’s state-owned banks to lend more to small and medium-sized manufacturers, many of which are exporters. The country’s 70 financial institutions, all state-controlled, have been lending heavily to state-owned enterprises; some are exporters, but many are engaged more in domestic activities like real-estate development and infrastructure.

  However, in anti-subsidy trade cases, the US Department of Commerce typically regards loans from state-owned banks as carrying subsidized interest rates. Loans are widely issued at fairly low interest rates through a system that allocates credit based partly on export sales.

  The strong Chinese exports last month came after a much weaker month in April, when shipments to Europe actually shrank. However, US demand for Chinese goods has been consistently strong.

  Last month had an extra workday this year and April had one fewer day because of the timing of Chinese holidays, but this has had a limited effect on exports because manufacturers schedule enough shifts to meet demand.

  The biggest question mark is the extent to which manufacturers can continue to offset rising labor costs with investments in automation and the reorganization of often-inefficient work practices.

  China’s current Five-Year Plan calls for industrial wages to rise 13 percent a year through 2015, and some cities have been raising their minimum wages even faster.

  Lee of the TAL Group said that his company’s labor costs were already rising at least 15 percent a year. By contrast, productivity per worker is rising only half as fast as wages, he said, as the manufacture of woven shirts is hard to automate. The TAL Group has found some efficiencies through reorganizing its employees into smaller work teams.

  If Foxconn (富士康) , which makes iPhones and other electronic products for Apple and many other manufacturers, fully carries out all of the pay and overtime policy changes that it announced in February, then its labor costs per worker could rise as much as 40 percent, Lee said, adding that this would put heavy pressure on other manufacturers like TAL to raise wages even faster.

  Many Chinese and Hong Kong companies have started diversifying production by opening factories in Southeast Asia, where wages are now lower than in China. The TAL Group has diversified by setting up operations in Thailand, Malaysia, Indonesia and Vietnam.

  However, many other Chinese companies compare Southeast Asia’s infrastructure and bureaucracies unfavorably to China’s and are staying close to home.

  Hongyuan has just faced a choice of whether to send senior managers late this summer to a conference in Vietnam promoting factory investments there or to a trade fair in Las Vegas, sales manager Rachel Wang said.

  After deciding that China was still a competitive base for exports, through use of equipment like the computer-controlled drill, and that the US would keep importing, the company chose Las Vegas.

  Additional reporting by Hilda Wang
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