China economy

Chinese exporters: weaker yuan won’t make up for trade war impact

Despite significant drop in the currency’s exchange rate against the dollar, firms are having to absorb higher costs as well as US tariffs, they say at major trade fair

PUBLISHED : Thursday, 18 October, 2018, 6:22pm
UPDATED : Friday, 19 October, 2018, 3:25pm

The sharp weakening of China’s currency so far this year is far from enough to offset the impact on its exporters from the trade tariffs imposed by the US government, Chinese firms said during the country’s biggest trade fair this week.

The tariffs have piled extra pressure on Chinese firms already being squeezed by higher costs for rent, labour, energy and taxes, the firms explained at the event in the southern city of Guangzhou, the centre of China’s export industry. Many will be forced to close or move to lower-cost countries such as Vietnam and Cambodia to survive, they said.

The 25,000 Chinese exporters at the 124th China Import and Export Fair – also known as the Canton Fair – face the question of what to do if orders from the United States decrease.

The US was the second-largest source of buyers after Hong Kong at the last edition of the twice-yearly fair, with 12,000 US buyers attending, but the fair’s spokesman admitted on Tuesday this “might be affected by US trade policies”.

China’s yuan has weakened by more than 9 per cent against the US dollar in the past six months.

Although the US Treasury Department announced on Wednesday that it had concluded China was not manipulating its currency, it nonetheless warned against further depreciation.

This year’s sharp depreciation was likely to exacerbate China’s trade surplus with the US, which stood at US$375 billion last year, the department said.

Chinese exporters, however, said the weaker currency was not giving them much benefit.

Trade war: Chinese exporters fight to save profit margins at country’s biggest trade fair

Alex Qian, a sales manager with a manufacturer of laminate flooring based in eastern China’s Jiangsu province, said at the fair that the yuan’s current value against the US dollar allowed them to offer a 3 per cent discount at most on exports to the US.

“We cannot afford more because costs are rising like crazy,” he said. “We already lost all our profit margin and now depend on [a government] export tax rebate to survive.”

Qian’s firm’s products were covered by the tariffs list specified by the US government in September, and are now subject to a 10 per cent tariff – set to rise to 25 per cent on January 1 unless China offers trade concessions.

US Treasury staff finds ‘China is not manipulating yuan’

He said in the past year his firm had lost almost all of its US clients, which used to account for 70 per cent of the company’s export total, as rising costs made their products less competitive compared with Europe-based rivals.

The company was shifting its export sales focus to the Canadian market to avoid US tariffs, Qian said, but he did not expect that to make up for the loss of its US market.

Max Feng, a sales manager with a manufacturer of home and office furniture in the eastern Chinese city of Ningbo, said the weaker yuan had done little to help her company.

It does help the company’s sales volume, because prices of their exports are set in US dollars, she said. “But we do not feel much relief, because prices for raw materials like steel, plastic and wood are rising rapidly and we face large expenses to comply with the environmental protection campaigns in China,” she added.

To support its domestic manufacturing, China has to buy large amounts of raw materials such as iron ore and crude oil from global markets. Because most of these materials are priced in dollars, a weaker yuan increases the cost for domestic manufacturers.

A top-down environmental protection campaign launched by Beijing last year has pushed factories to upgrade their equipment. Tens of thousands of factories around China have been closed after failed inspections, or been fined.

Core products of Feng’s company, including manual and electric sit-stand desks, were also added to the US’ tariffs list in September.

Feng said none of her US clients had visited the company in Guangzhou this year, and she had no idea how to compensate if it were to lose its US market next year.

Is China about to let the yuan weaken below seven to the dollar?

“There is no room for us to cut prices,” she said.

Other businesses have been flourishing, at least in the very short term, while prospects for any resolution of the US-China trade war remain gloomy and concerns about a deteriorating trade outlook persist, because of US customers front-loading orders to avoid imminent extra tariff costs.

Lisa Lee, sales director at a lamp manufacturer based in Shunde, Guangdong province, said its factory has been running at full capacity in recent weeks, with employees working seven days a week to fulfil rush orders from the US.

China’s factory base cuts business costs, rolls out red carpet to foreign investors as trade war bites

“A 10 per cent tariff was imposed on our products in September and it is likely to be raised to 25 per cent next year, so there are a lot of orders from US clients trying to ensure products clear US customs before January,” Lee said.

But she said she did not know what may happen in 2019, given there was virtually no room to bring down prices, because of rising costs in China.

Henry Shen, a sales manager of a producer of artificial grass in eastern China’s Shandong province, had a ready-made solution because the company opened a plant in Vietnam last year that now offered it the ability to circumvent the 10 per cent tariff imposed in September on artificial grass from China.

The firm’s US clients ordered more than US$100 million worth of artificial grass in 2017, he said, adding: “All the orders we get from our US clients are now handled by our plant in Vietnam.”