Chinese Exporters “Cope”

November 1, 2010
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Supplychain.cn conducted a survey of Chinese exporters that I think illustrates how they’re skirting on a razor’s edge. One-third felt that overseas exports will decline if the Yuan appreciates a mere 2%, and roughly two-thirds thought so if it appreciates 3%.  However, the survey says their biggest concern is materials cost. Prices have skyrocketed far beyond the 2% advance in the Yuan since June. Twenty-one percent said materials costs were their biggest concern, and 20 percent cited price competition as a critical issue. For 18 percent,  labor shortage was the key challenge; and only 12 percent said the Yuan’s appreciation was their main concern. Under reported in all this is China’s elimination of a large number of export tax rebates and subsidies to exporters last summer .

Because profit margins were expressed as “2 or 3%,” even by the Chinese Premier, it is not too difficult to see why Chinese exporters are behind the eight ball on the real issue of material costs. Since announcing their plan to let the Yuan appreciate, input and commodity prices measured by an assortment of indexes have climbed 20%. Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, with home heating oil rising 18% year-over-year. Heaven knows what happens next if QE2 is put into play.

Meanwhile, China’s failing merchantilism has fueled tensions with Japan as Yen appreciation has crippled Japan’s export-price competitiveness. But this has put Japan in a better position to compete for input goods. Having strong competition from Japan for resources does little to help with China’s problem of making products at a loss, and if you look at the “coping” chart below, the Chinese are no longer really interested in capturing export-market share; in fact, quite the opposite.

Click to enlarge

Any prior inventory of input goods accumulated when prices were cheaper are being depleted, and will need to be replaced at higher prices.  Since the cost of materials is the real issue for Chinese exporters, it is not too hard to see that linking to the USD and US monetary policy is a failed and  losing proposition. Materials cost increases would be even more severe if energy prices spiked. However many soft commodities like cotton and foods prices are up far more.

This food inflation is impacting the Chinese worker and, as a result, labor costs are mounting in China.

Sixty-four percent of suppliers said they continue to be in need of workers, even as monthly wages have been increased. The shortage is more prominent in areas outside the Pearl and Yangtze River Delta regions, as salaries there are lower than in the coastal provinces.In fact, 75 percent of respondents said their employees have sought higher salaries or made other demands in the past three months. In addition to raising monthly wages and overtime pay further, companies are improving the living conditions in factory dormitories to retain and attract workers. Some dormitory rooms now have individual beds and computers with Internet connection.

Click to enlarge

How Chinese exporters cope with this is ominous for the US supply chain.  A full 30% indicate that they will just abandon the export market and shift to the domestic market. Bloomberg reports that a Chinese toymaker is turning down European and US orders. With global air freight traffic down 6% since May and 2.1% in September, this may be under way even before the recent run up in input prices. Just demonstrating what a strange brew stranguflation truly is, Target and Wal Mart are heavily discounting toy sales for Xmas.

Prices wars are brewing in TV and electronics.

U.S. retailers such as Target Corp. and Wal-Mart Stores Inc. are sweetening discounts ahead of the holiday season to move merchandise as joblessness hovers near a 26-year high. Target, the second-biggest discount retailer behind Wal-Mart, said this month it would lower prices on more than 1,000 toys to attract shoppers. Wal-Mart responded with its own discounts.

To support this transaction, China cannot depend on real estate manias and wild speculation to generate fly-by-night wealth and income necessary to support the export sector’s overcapacity. Although wages and incomes are rising in China, it is coming from low levels; and, in the short and intermediate term, they are simply inadequate to support this shift. Thirty percent of the rest who stay with the export model intend to raise prices.  The end result is that US buyers will find fewer sources for goods, and higher prices will be the order of the day.

One Response to Chinese Exporters “Cope”

  1. Chauncey Gardiner on November 3, 2010 at 1:41 pm

    Wow! According to http://statsweeper.com/ there h/b a 21 pct decrease in the value of container shipments to West Coast U.S. ports over the past three months, with decline appearing to accelerate in October (appears to contradict Port of Long Beach YoY statistics for September).
    Difficult for me to get my arms around the ramifications of this development across sectors, and related market and policy implications.
    Thanks for posting this piece, Russ.

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