Export pinch may not be so bad
At some point today or tomorrow, China is expected to announce its trade numbers for March. Most analysts are predicting an impressive rebound from February's lacklustre performance, with exports up by about 33 per cent year on year last month, compared with an increase of just 6.5 per cent for February.
The apparent vigour of the recovery will be largely illusory. The forecast rise in March's exports has a lot to do with the distorting effects of the mainland's Lunar New Year holiday, coupled with February's severe winter weather.
Behind the headline number, the expected rise in exports masks growing concerns about the health of the mainland's exporters, who are being assailed by rising costs on one side and by softening international demand on the other.
The impact is being felt especially keenly on the Pearl River Delta. Over the last year, manufacturers in the region have suffered a series of hard knocks. Firstly, the cost of their raw materials has risen. In February, China's producer price index - a measure of wholesale inflation - was up 6.6 per cent over the previous 12 months, compared with just 2.6 per cent in February last year.
It isn't only raw materials that are getting more expensive. The combination of the mainland's new labour law, increases in minimum wages and a shortage of skilled workers has pushed labour costs sharply higher. Average wages rose 19 per cent last year, outstripping productivity increases in some sectors.
On top of that, tax rebates for exporters have been cut, while the yuan has appreciated against the US dollar, squeezing margins on exports to America (see chart).
Against this background of rising costs, demand from the region's largest single export market has been weakening as the United States has tilted towards recession and American consumers have tightened their belts.
The effect has not been felt equally. Exporters of higher-margin, more capital-intensive goods like car parts have fared better, passing more of the cost increases on to customers.
But low-margin, labour-intensive contract manufacturers of clothing, toys and cheap electronics, of whom there are tens of thousands in the Pearl River Delta area, have felt the pinch. Unable to pass on cost increases because of intense competition, some are going to the wall. Trade association surveys indicate that with costs up 20 per cent over the last year, as many as 20 per cent of Hong Kong-owned factories in the region have closed, with dire warnings that many more will follow.
That sounds like carnage, but things may not be so bad. The companies that are closing tend to be the least efficient, those that have prospered until now only by paying rock-bottom wages and by taking advantage of a cheap currency and lax health and environmental standards. Some will move to interior provinces or countries such as Vietnam or Bangladesh with lower wages.
Others will merge, or shift to producing higher-margin or branded goods. In the long run, those that survive in the Pearl River Delta region will do so by adding more value in the manufacturing process. That is a positive thing overall, whatever the monthly trade figures say.
