As U.S pushes China on currency, small manufacturers say they're already hurting

By Keith B. Richburg
Washington Post Foreign Service
Sunday, October 31, 2010; 8:42 PM

YIWU, CHINA - Christmas these days comes mostly Made in China. But the producers of all those plastic Santas, artificial trees and brightly painted bulbs are fretting this holiday season over falling profits - and worried that next year could bring even worse tidings.

The concern, they say, is the exchange rate between the U.S. dollar and the Chinese currency, the renminbi, commonly called the yuan. Since mid-June, when China, in response to U.S. and international pressure, announced it would allow its currency to float within a narrow band, the renminbi has appreciated roughly 2.5 percent in value against the dollar.

That amount is far too little, say many American critics, including economists and a bipartisan group of lawmakers in Congress who are pushing for a far greater appreciation - somewhere between 25 and 40 percent - and who want to use the threat of U.S. trade sanctions to get the Chinese government's attention.

But the small-scale manufacturers and wholesalers who bring Christmas to U.S. department stores and shopping malls say the currency has already shifted too much. And their concerns are at the heart of Beijing's reluctance to take more dramatic action.

"If the renminbi keeps appreciating, our prices have no more room to drop," said Cai Qin Liang, 38, who has been in the business making Christmas ornaments and handicrafts for more than a decade. "We can just stop making these Christmas accessories, but foreigners still celebrate the Christmas holiday and need these things."

It is small manufacturers such as these that the Chinese government says it is worried about as it resists calls for a larger and more rapid appreciation of the currency. Officials in Beijing have consistently said that any reform of the yuan must be gradual to avoid widespread disruption - meaning they fear small-scale producers might be put out of business.

Backing in Beijing

These manufacturers have a powerful ally in the Ministry of Commerce, which represents their interests inside the central government. It has constantly and publicly taken a harder line in arguing that the value of the renminbi is just right, as opposed to the Central Bank, which has pushed for an appreciation.

To help make their case in the United States, Chinese leaders and economists have also warned that U.S. consumers could suffer if Chinese manufacturing plants are forced out of business.

Cai, also vice chair of the local Christmas-accessories merchants association, agreed. "The renminbi appreciation is a double-edged sword," he said. "It won't just affect the Chinese manufacturers. It will also affect the customers, more importantly. They'll have to pay more for the same stuff."

In the United States, the debate is over whether China manipulates its currency, buying dollars to keep the yuan artificially low and the volume of Chinese exports high - in the process increasing its trade imbalance with the United States and making it harder for the U.S. to pull out of recession.

But here in Yiwu, a thriving trade city of about 2 million people in Zhejiang province near China's east coast, the view looks far different. Unlike Guangdong province in the south, which has largely shifted to producing higher-end, higher-tech products such as cellphones, laptops and iPads, Yiwu has emerged as the center of China's small-scale, low-end manufacturing - socks, zippers, batteries, plastic baby toys, inflatable swimming pools.

One section of the city, spread over several square blocks, is known as "Christmas Village," stacked with some 260 look-alike shops offering all the accoutrements of modern-day American Christmas - the plastic snowmen and reindeer for the front lawn, stockings for the chimneys and brightly painted ornaments for the trees. The red suit with white fur trim worn by most suburban mall Santas probably came from one of these shops in Yiwu.

But unlike with a laptop or an iPad, the profit margin on a Santa suit or a Christmas tree ornament is simply not that big.

"The price is not very high, so we make up for it in quantity," said Gong Yue Quan, 41, whose company makes and sells small, do-it-yourself toy parts such as tiny colored pompoms and pipe-cleaner stems. He said it now costs about 4.5 renminbi (about 68 cents) to make a bag of pompoms that might sell in the United States for as little as $5.

"It's impossible to keep dropping the price," Gong said.

A lot like Christmas

October is normally the time of year when Christmas orders are shipped to their overseas destinations, and on a recent visit Yiwu was bustling with workers packing and stacking boxes. About 80 to 85 percent of these Christmas goods are for export, since Christmas is not widely recognized or celebrated in China - except for at the big-city hotels, restaurants and bars that cater to foreigners.

This is also the time when the manufacturers should begin taking orders for Christmas 2011. But there is an uncertainty, they said; without knowing what the exchange rate will be, they are hesitant to take any new orders.

Sun Lijian, an economist with Fudan University in Shanghai, said he thinks the recent appreciation of the Chinese currency means that its value is already reaching a breaking point for many small companies. If the renminbi appreciates above 6.5 renminbi to the dollar, Sun said, "they will have zero profit and they'll go bankrupt.''

"The U.S. thinks the appreciation is not enough," Sun said. "But for the Chinese side, it has already appreciated quite a lot."

Gong and other small manufacturers, gathered here for a trade fair, said they have also been hit by increased shipping charges, rising energy fees and, above all, higher costs for labor. After a series of factory strikes by low-paid workers last spring, and with fear of more labor unrest, local governments recently raised the minimum wage - including here in Zhejiang province, which now has one of the highest minimum wages in China.

"With the raw materials, the labor costs, the cargo fees going up and now the renminbi appreciation, it's really hard to do business," said Huang Hongying, 50, who runs a company with her husband making plastic products such as inflatable backyard pools, pool toys and rafts.

In the past, Huang said, her profit margin on each product was around 5 to 6 percent. Now, she said, it's less than 2 percent. "I hope the American government doesn't put too much pressure on China," said another manufacturer, Tyrone Tian, 40, whose company sells rafts and inflatable boats.

"We just want some stability between the dollar and the renminbi," Tian said. Any further appreciation, he said, "will be a disaster for Chinese exporters."

Staff researcher Wang Juan contributed to this report.

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