The surging yuan, partly driven by record foreign exchange reserves, is cutting into profits of mainland-based exporters. Photo: EPA

Exporters in Guangdong's Pearl River Delta seek relief from surging yuan

With no sign of the yuan's rise slowing down, exporters in the Pearl River Delta are hurting

Factory owner Danny Lau Tat-pong is desperately searching for a way to reduce the pain from the relentlessly rising yuan.

The Dongguan, Guangdong-based factory owner from Hong Kong recently met with more potential customers on the mainland in the hope that he could lower his reliance on exports as the yuan keeps breaking records.

This is the second time the 63-year-old exporter of architectural coatings and aluminium curtain walls has tried to enter the mainland market in the past decade.

In the 2000s, he literally "gave up" on the domestic market and focused on the United States and Hong Kong, because of rampant problems with receivables and tough competition.

Expensive locations do not necessarily mean manufacturing [is] unviable

Now, as the yuan hovers close to the important psychological level of six yuan to the US dollar, Lau is being forced to return to the mainland market and create products with higher profit margins to stem the erosion of his bottom line.

"The yuan's appreciation will continue for some time," said Lau, whose father moved their factory, Kam Pin, from Hong Kong to Da Long town in industrialised Dongguan 26 years ago.

"We need to earn some yuan to offset expenses such as wages, utility bills and raw materials [which are denominated in yuan]."

Lau is among tens of thousands of Hong Kong exporters in the Pearl River Delta, dubbed the "factory of the world", who are reeling from the recent strength in the yuan.

A stronger yuan adds salt to the wounds of factory owners already suffering from rising wages, worsening labour shortages, weak demand and government policies of weeding out labour-intensive, pollution-inducing and energy-consuming industries.

The yuan's appreciation shows no signs of abating, and it is on track to gain a further 2 to 3 per cent against the US dollar this year, economists say.

The appreciation is partly driven by the mainland's foreign exchange reserves, the world's largest, which soared US$508.4 billion to a record US$3.82 trillion last year.

The yuan, which gained 2.95 per cent last year, rose 0.09 per cent on Friday to 6.0502 per US dollar, according to the China Foreign Exchange Trade System in Shanghai. It was trading near the all-time high of 6.0406 last Tuesday, the strongest since the government unified the official and market exchange rates at the end of 1993.

Standard Chartered economists raised their yuan forecast last week to 5.92 per US dollar by the end of this year from a previous estimate of 6.03.

RBS raised its year-end yuan forecast to 5.88 per US dollar. The smaller the number of yuan required to buy a US dollar, the stronger the Chinese currency.

"Policymakers will continue to allow the yuan to strengthen at a relatively fast pace this year," RBS economist Louis Kuijs said. "Export growth is picking up, and amidst better global demand growth, we expect export momentum to continue to develop favourably."

According to the General Administration of Customs, the mainland's exports grew 7.9 per cent last year to US$2.21 trillion.

Among all the country's provinces, Guangdong's export growth, at 10.9 per cent to US$636.4 billion, exceeded the country's average.

China is due to release gross domestic product growth data this morning.

Wilson Shea Kai-chuen, who runs packaging factory Success Products in Dongguan, said the yuan's appreciation has exacerbated the already hostile operating environment in the delta.

"Many migrant workers have returned to their hometowns earlier this year for the Lunar New Year," he said.

Labour shortages and the mainland's demographic changes have decreased the number of migrant workers at his factory to about 40 from nearly 300 two years ago, he said.

Shea outsources a majority of his production to third-party factories.

Meanwhile, seeing dim prospects for the manufacturing business, he has tested the waters of Shenzhen's booming food and catering sector by opening a snack shop.

Hong Kong Shippers' Council chairman and garment maker Willy Lin Sun-mo does not think a stronger yuan will put an end to manufacturing in the Pearl River Delta.

"We cannot do much about the yuan's appreciation, but expensive locations do not necessarily mean manufacturing activities are unviable," he said.

He said the Pearl River Delta's sophisticated logistics network, supply chain services and established supply of raw materials make it attractive for manufacturing, but industries will have to step up use of automation.

This article appeared in the South China Morning Post print edition as: Exporters seek relief from yuan