Export manufacturers located in the Pearl River Delta are suffering as the RMB appreciates. It was revealed at the Private Sourcing Event held in Guangzhou days ago that most suppliers now prefer the Euro, Japanese Yen, and Australian Dollar as currencies for trade settlement in Europe, Asia, Australia and other markets. Meanwhile, as production costs have been pushed up by a number of factors including the New Labor Contract Law, reduction of tax rebates and depreciation of the USD, most suppliers have been forced to raise export prices. International trade experts believe that China is no longer the manufacturing base for low-priced products. And it is acceptable to buyers for price increases of between 5 and 10 percent.

RMB Appreciation Deals Blow to Exporters

Seven top international buyers representing US$170 billion in combined sales attended the Private Sourcing Event. Craig Pepples, Chief Operating Officer of Global Sources, said: "Although some are predicting an economic slowdown caused by the subprime crisis in the US, there have not been many cancelled orders in the Pearl River Delta. However, the exchange rate remains the big problem. China’s exchange rate controls put in place years ago has caused some problems. As most deals are settled in US dollars and the dollar keeps depreciating, the new floating exchange rate mechanism has caused great losses for suppliers.

Last Thursday, The exchange rate for the RMB against the USD reached 7.014 with the breaking of 7 RMB imminent. Since the start of 2008 until now, the exchange rate of the RMB against the USD has increased nearly 4 percent.

Wu Chengzhang, Deputy General Manager of Neon-Neo, a Hong Kong listed company with a factory in Jiangmen, Guangdong Province, said: "The trading process from quotation to product delivery usually takes about six months to a year. As the USD rate keeps dropping, settling the bills at prices first quoted will cause great losses for suppliers. As a result, we would like to quote in Euros, Japanese Yen and Australian Dollars to avoid such loss."

A representative from the International Business Department of Opple, a Guangdong enterprise, said:"In order to minimize the impact of exchange rate fluctuations, we want to share the risks with buyers when quoting in USD. For exports to European markets, we insist on Euro quotations."

Manufacturers Look to Switch Buyers

With a number of factors at work, such as the US dollar depreciation, the New Labor Contract Law as well as the new tax rebate policy, relationships between manufacturers in Pearl River Delta and their clients have changed – manufacturers are wooing new buyers, while deserting the old ones because, by changing buyers, they can significantly raise prices. Suppliers used to have 30 percent buyer turnover, but now it has climbed to 40 percent. Wu said: "We are trying to increase our revenues by finding new clients at a rate of 20 percent every year."

In view of low profit margins, some export manufacturers have started focusing on domestic sales. Wu said currently domestics sales only account for 20 percent of their total sales. But he expects that number to go up to 50 percent in the next two years.

Manufacturers have also increased the export quotes this year. "Take lamps, for example. The retail price was one US dollar in 2006; but in 2007, the production cost alone soared to 1.7 US dollars. We’d be out of business if we hadn’t raised prices," Wu said.

Some buyers understand the need to raise prices. Brookstone, one of the largest specialty retailers in North America, purchases electronic products from 278 suppliers in Pearl River Delta at present. President of Brookstone Asia, Chen Yonghe, said that nearly 30 of their suppliers have gone out of business recently. Suppliers cannot maintain their operations if they do not raise export prices. Recently, prices of products his company purchases have gone up by about 25 percent.

Craig Pepples, Chief Operating Officer of Global Sources, believes that price increases of between 5 and 10 percent will be acceptable to buyers.