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Higher Costs, Strong Yuan Puts Pressure on Chinese Manufacturers


The world's factory is giving notice: it can no longer provide the planet with cheap goods. Chinese manufacturers say higher production costs, tighter credit and a strengthening yuan are squeezing margins. Some industry experts and economists predict thousands of small factories could shut down this year and leave thousands of workers jobless - creating new problems for China. Heda Bayron reports from Hong Kong.

At the China Sourcing Electronics Fair in Hong Kong this month, buyers from all over the world check out Chinese products, from antennas to video game consoles.

But if they like what they see here, buyers will have to pay more than they did a year ago.

One sales manager says it is hard to make a living nowadays as an exporter. Ms. Tang works for a company that makes remote controls in Shenzhen in southern China.

"The cost of the finished product is increasing…. And our profit is becoming smaller and smaller," she explained.

A triple whammy is hitting Chinese manufacturers: rising costs, a strengthening Chinese currency, and a tightening credit market.

The Federation of Hong Kong Industries predicts that rising costs will force as many as 14,000 Hong Kong-run factories in southern China to shut down this year. A similar number could close next year.

The federation says operating costs have gone up more than 20 percent. Labor rose more than 20 percent, in part because of a new law that makes it harder for companies to hire temporary workers and requires factory owners to pay benefits.

Pansy Yau is the deputy chief economist of the Hong Kong Trade Development Council.

"For example some toy manufacturers they told me … profit as low as five percent is already very good. Now the renminbi [yuan] appreciated against the dollar 15 percent. How many manufacturers can survive?" Yau said.

All this is happening as China's main customer - the United States - is on the verge of a recession, and demand for Chinese exports is expected to decline.

Last week, the dollar fell below seven yuan, the lowest since China ended the yuan's peg to the dollar in 2005. This makes Chinese exports more expensive for U.S. consumers.

The United States and other countries have consistently called on Beijing to let the yuan appreciate and say China's managed exchange rate contributes to their large trade deficits with the country.

Exporters also face high interest rates and a tight credit market because of government efforts to cut inflation and slow China's galloping economy.

David Kiang is vice president of Shenzhen Ping An Bank. He says new limits on bank lending have forced some companies to borrow from underground money lenders - who charge three percent interest a month, or 40 percent a year.

He says that hurts smaller companies.

"How many could afford 40 percent interest rate? Very few," he noted. "If this scenario would continue longer, something has to break. It's not the state enterprises because they can turn to the big banks for support, but the small and medium-sized companies get squeezed."

Though exporters are raising prices, they say they can not charge too much for fear of losing business. A survey of more than 300 exporters by trade show organizer Global Sources showed most will keep increases at five percent or below.

A sales representative of a company that makes machine switches says buyers are balking at higher price tags.

"We can just raise our price a little," he said. "Though the materials are expensive, though workers are expensive but we should have more business. The price can't just rise at the same level."

Yau at the Hong Kong Trade Development Council says companies will have to move toward making more expensive goods and automate their factories if they want to survive.

But some foreign factory owners in China have already thrown in the towel, moving to Vietnam.

Kiang says the situation could create more problems for the Chinese government.

"If these companies are moving to other places, I think the unemployment problem in China will be more acute," Kiang said. "The Chinese government on one hand should be concerned about inflation and protect the labor force but at the same time it has to do it in a way, at a speed of implementation such that it allows these manufacturing companies time to adjust, otherwise it could result in some dislocation."

Economists say as China faces a tough balancing act. It has been letting the yuan appreciate and cutting lending to control inflation, because rapidly rising prices could bring protesters to the streets. On the other hand, China needs to avoid squeezing exporters too hard, because they provide crucial jobs in a country with tens of millions of unemployed workers.