china question again

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

I have asked this quesiton several times before, always receiving
excellent answers. So here is the NY Times saying that China will be
moving up the value chain to compete with the more advanced economies.
How feasable will that be?


April 20, 2006


 Rising Yuan Pushes China Upmarket

By KEITH BRADSHER
<http://topics.nytimes.com/top/reference/timestopics/people/b/keith_bradsher/index.html?inline=nyt-per>

GUANGZHOU, China, April 19 — 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
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=GE>
turbines and Microsoft
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=MSFT>
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
<http://topics.nytimes.com/top/reference/timestopics/people/h/hu_jintao/index.html?inline=nyt-per>
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
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=WMT>
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
<http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&symb=HMC>
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.


--


Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901