China's Export Engine

By Peter S. Goodman and Paul Blustein
Washington Post Staff Writers
Wednesday, September 13, 2006

SHANGHAI -- Hunched over clattering machinery, the 170 workers at a factory here churn out gleaming pistons for auto engines by the crateful, driven by surging demand from abroad. To hear managers at Shanghai Datong Automotive Industrial Co. tell it, their success overseas is due to efficiency and rock-bottom costs. "Our technology is good, our wages are low and materials are abundant," said Jin Zhangfu, the plant's manufacturing supervisor.

But in the American heartland towns where auto parts makers are struggling to survive, an entirely different explanation -- China's cheap currency -- is proffered for the competitiveness of companies such as Shanghai Datong. Such complaints are expected to get high-level attention in coming days as the Bush administration's new Treasury secretary visits Asia.

Wes Smith, president of E&E Manufacturing Co. of Plymouth, Mich., a maker of fasteners and other auto components, blamed much of "the world of hurt" his company is suffering on Beijing's policy of keeping the value of the yuan tightly controlled at a level that, he said, gives Chinese manufacturers an unfair advantage.

"It's not that we're competing against the so-called dollar-a-day wage," Smith said. "It's that they subsidize their production with currency manipulation."

Criticism over China's currency policy has alternately flared and subsided for several years, but the problem is reaching a new and potentially explosive stage as the Chinese export juggernaut moves up the ladder from clothes, toys and televisions to goods such as auto parts.

The issue is to be debated this weekend at annual meetings of the International Monetary Fund and the World Bank in Singapore, and again during Treasury Secretary Henry M. Paulson Jr.'s visit to China next week. Although some economists view the matter as overblown, others say the yuan's exchange rate is so far out of line as to constitute a dangerous distortion in global trade.

At a hearing last month of a body created by Congress to study U.S.-Chinese issues, Brad Setser, director of global research at Roubini Global Economics LLC, said that China's exports, which were about $325 billion in 2002, are on pace to reach $950 billion this year, "an extraordinary increase" in a brief period. During that time, he added, the Chinese current account surplus, the broadest measure of the gap between exports and imports, has risen six-fold, to an estimated $220 billion in 2006, an amount equal to about 8 percent of China's total economic output.

That is simple but powerful substantiation that the yuan is grossly undervalued, in the view of Setser and other economists.

In 2002, the U.S. dollar began declining sharply against other major currencies including the euro, British pound, Japanese yen and Canadian and Australian dollars, but not the yuan, which the Chinese government kept rigidly pegged at 8.28 per dollar. Under pressure from the United States, China announced in July 2005 that it would raise the value of the yuan by about 2 percent and allow it to move more according to supply and demand. But Beijing's restrictions over money flowing in and out of the country have helped keep further appreciation to a minimum -- about another 2 percent, far less than the 20 to 40 percent that some analysts estimate is warranted.

Auto parts illustrate the phenomenon clearly.

China's rapidly growing auto industry used to depend heavily on imported components, but last year for the first time the country exported more auto parts than it bought from abroad. Sales to the U.S. market have leapt 39 percent, to $5.4 billion in 2005. Worldwide, China has set a goal of exporting $70 billion worth of parts by 2010--a seven-fold increase from last year's level. That is exacerbating the woes of a U.S. industry that is already struggling, as witnessed by Delphi Corp.'s Chapter 11 bankruptcy filing. And while labor costs explain much about why Chinese firms have penetrated such sectors as furniture, auto parts makers blame the currency as a decisive factor.

For example, Dura Automotive Systems Inc. of Rochester Hills, Mich., has manufacturing plants in 14 countries, including China. It sells parking-brake cables made in the United States for $4.50, on which it earns a profit of 35 cents. The sales price in the United States of comparable Chinese cables is $3.70, effectively less than the U.S. cost of production, said Larry Denton, Dura's chairman and chief executive.

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