Wen Conflicted as Yuan Rise Moving Teddy-Bear Jobs

BEIJING, May 6  -- Lovely Creations Corp., the supplier of talking teddy bears to Wal-Mart Stores Inc., may move some of its 800 Chinese assembly jobs to Vietnam because the currency is eroding profits.

"The yuan's appreciation would mean we lose our profit margin," said Poh-Heng Toh, general manager at Lovely Creations, a Taipei-based manufacturer with factories in the coastal provinces of Guangdong and Zhejiang. "We also have higher labor costs in China because, as the economy develops, workers demand better lives while our end customers like Wal-Mart won't raise what they pay us."

As the U.S., India and Brazil raise pressure on Premier Wen Jiabao to end the yuan's almost two-year peg to the dollar, business leaders say they're ready to relocate where costs are lower. Haier Group, the biggest Chinese appliance maker, built plants in India and Thailand. U.S. shoemaker New Balance shifted orders to Indonesia. Li & Fung Ltd., a leading supplier to Bentonville, Arkansas-based Wal-Mart, bought 5 percent fewer consumer-goods in China in 2009 and 20 percent more in Bangladesh.

The yuan's relative weakness and minimum wages still at least 86 percent lower than in the U.S. underpinned exports that powered 10 percent annual growth in the past two decades and made China the world's third-largest economy. Currency gains may hurt light-manufacturing, textile, electronics and machinery industries that account for 70 million jobs and 70 percent of industrial exports, Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology, said April 22.

‘Lobbying Extensively'

Allowing the currency to appreciate would help reduce costs of the nation's $1 trillion in imports and boost spending power for its 1.3 billion people. It also would add another challenge for Wen, who is attempting to quash property speculation at a time when investors are already skittish about prices of financial assets. The benchmark Shanghai Composite Index has fallen 16 percent this year, more than any market in Asia. Hedge fund manager Jim Chanos said in April China's real-estate market is a bubble that may burst as early as this year

Wen, 67, probably will avoid a "mega-revaluation" and cap yuan gains at between 3 percent and 5 percent in the coming year to balance these goals, said Edwin Gutierrez, who oversees $5 billion of emerging-market debt for Aberdeen Asset Management Plc.

"Chinese policy-makers always move in gradual steps," Gutierrez said in an April 29 interview from London. "Margins for many coastal manufacturers, especially in rust-belt industries like textiles, toys and shoes, are pretty thin already and they've been lobbying extensively not to revalue."

Yuan Forwards

China halted the currency's 21 percent, three-year advance against the dollar in July 2008 to help exporters weather recessions in the U.S., Europe and Japan. Twelve-month non- deliverable yuan forwards fell 0.6 percent to 6.6875 per dollar as of 4:06 p.m. in Hong Kong, reflecting bets the currency will gain 2.1 percent from the spot rate of 6.8262 in the coming year.

While Wen froze the exchange rate against the dollar, the yuan has continued to appreciate against other major currencies, rising 16 percent against the euro in six months as Greece's debt crisis threatened to slow an economic recovery in the region that has become the biggest buyer of Chinese goods. The currency also strengthened 45 percent against the Vietnamese dong in the past five years.

Gross domestic product per capita in China has risen to $6,600, compared with $4,000 in Indonesia and $2,900 in Vietnam, according to Central Intelligence Agency estimates. Guangzhou, the capital of China's richest province Guangdong, raised its minimum wage 28 percent on May 1 to the equivalent of about $1 per hour, compared with $7.25 in the U.S.

Seeking a Delay

Sales at Lovely Creations, which has surveyed sites in Vietnam and Indonesia in case it is forced to move, dropped 16 percent in 2009, Toh said at last month's Hong Kong Electronics Fair. Li & Fung, Hong Kong billionaire William Fung's trading company, said sales fell 6 percent last year, the first decline since the company went public in 1992. Runliu Willow Arts & Crafts Co., a fence maker in the eastern province of Shandong, said its revenue fell about 50 percent between 2007 and 2009.

"We have to raise prices by 20 percent after raw-material costs quintupled and labor costs gained 5 percent this year," Zhang Ranzhong, a manager at Runliu Willow, said last week at the Canton Fair in Guangzhou. "We hope yuan appreciation can be delayed until the autumn."

Global Expansion

Runliu may join a tour for executives to seek investment opportunities in Southeast Asian nations organized by the government, which is encouraging global expansion, said Zhang.

Haier's decision to open factories around the world made it "less exposed to the negative impact of the yuan's appreciation," said Zhang Tieyan, director of global branding at the Shandong-based company.

New Balance, the closely held Boston-based maker of athletic shoes, plans to find sub-contractors in Indonesia to augment four plants in China and one in Vietnam, Judith Mackay, Asia apparel and license compliance manager, said in a March interview. It's among four global shoemakers close to reaching similar sourcing agreements, Eddy Widjanarko, head of the Indonesian Footwear Association, said in an April 30 interview.

Treasury Secretary Timothy Geithner said April 23 in Washington that it is in China's own interest to shift to a more flexible currency to help bolster domestic demand. Central bank governors in India and Brazil said on April 20 a stronger yuan is needed to rebalance the global economy.

Benefits to China

A stronger yuan benefits companies selling into China with costs in foreign currencies, Terry Ho, chief financial officer at Xtep International Holdings Ltd., a Hong Kong-listed sportswear maker part-owned by Washington-based Carlyle Group, said in an April 28 interview. Xtep sales may grow about 20 percent this year as it opens as many as 1,000 stores in China, he said.

Manufacturers prefer to move factories inland because they can tap growing affluence in China, said Mark McCombe, chief executive officer for Hong Kong at HSBC Holdings Plc, Europe's largest bank. Domestic consumption added 6.2 percentage points to China's 11.9 percent growth in the first quarter from a year earlier, while net exports cut 1.2 points, according to the state statistics bureau.

"Traditionally factory owners producing goods in China would look for the shortest, most-efficient supply route out of the country," McCombe said in an April 27 interview. "Now they're investing much more time and energy in researching internal supply chains."

Supply Chains

The pace of the migration depends on the yuan's appreciation, Danny Lau, chairman of the Hong Kong Small and Medium Enterprises Association, said in an April 30 interview. Hong Kong manufacturers in Guangdong's Pearl River Delta fell to 50,000 from 70,000 in two years. About 20 percent of his group's 800 members may move inland or abroad, he said.

Lufeng Fu He Industrial Co., which makes wooden chairs and tables, will open a wood processing factory in Jiangxi province, west of its base in Guangdong, reducing costs by 10 percent, according to General Manager Xue Shuoxun.

"I would jump off a building to kill myself if the yuan has a one-time revaluation," he said at the Canton Fair. "It should be, as everyone has said, a 3 to 5 percent gradual appreciation by the end of this year."