More than 20 per cent of the factories in already hard-hit Dongguan will be forced out of business by the yuan's appreciation, which made their products less competitive than their international rivals, said an industry leader.
Johnny Yeung Chi-hung, vice-president of the Chinese Manufacturers' Association of Hong Kong, said, "When the yuan was stable, the manufacturers could survive the debt crisis in Europe." But with the currency climbing, the borrowing costs in yuan terms for manufacturers on the mainland rise sharply.
The Pearl River Delta, which includes Dongguan, Shenzhen and Guangzhou, has already felt the squeeze, with about one-fifth of the factories shutting since the global economic downturn began in 2008. This means an estimated 50,000 factories are operating in the Pearl River Delta run by Hong Kong people.
Yeung, who is also the chairman and chief executive of Fujikon Industrial Holdings, a maker of headphones for many international brands, said the stronger yuan against the US dollar would dent his profit margin. Some 60 per cent of his expenditure on raw materials is settled in yuan, while most of his products are shipped to overseas buyers who pay in US dollars.
The yuan exchange rate had been flat since January. But it rose against the dollar significantly after the US' third round of quantitative easing, the so-called QE3, was announced in September.
Statistics from the Canton Fair - one of the world's largest trade shows that is held each April and October in the southern mainland city - underpinned the fact that the economies in the US and Europe have yet to recover. The number of buyers from Europe and the US dropped by more than half just in the first week, while the total number of overseas buyers fell more than 11 per cent below the spring session, according to figures cited by Mizuho Securities.
"[Mainland] factories … can no longer rely on cheap pricing to win orders, instead they will have to upgrade their product mix to stay afloat," Yeung said.
Meanwhile, Fujikon has expanded its production of high-end items, such as Bluetooth headphones, as it has higher profit margins, which will help it protect itself against the appreciating currency.