Reality Check: Chinese Exporters Brace for Chill From Europe
Thursday, 5 August 2010 04:54 am
by Connie Young
BEIJING (MNI) - Chinese exporters are seeing relatively brisk business despite evidence of slowing global growth. But the good times aren't expected to last, with evidence already building that European demand is flagging at the same time as rising costs hammer profit margins.
China's trade data have been surprisingly strong in recent months, even as European officials have struggled to contain a debt crisis that threatens to engulf the single currency project, and as the jobless recovery in the U.S. sputters.
But the data may reflect orders placed when the outlook was more rosy, leaving Chinese manufacturers anticipating a scramble to cut already pared costs or find new markets once reality hits home.
Guo Weizhong, manager at leather and knit apparel-maker Zhejiang Willing Company, says business conditions in the first half reflected orders made at the end of 2009, when the European outlook was brighter. The company is now trying to make up for lost business in non-traditional markets, Guo said.
"European conditions were more optimistic, so the direction of the economy was better and people ordered more," he says. "But people have realized that the direction of the economy actually isn't that great, so slowly we've seen orders gradually fall."
Manufacturers interviewed by Market News International say there have been few signs of business flagging after the sharp recovery following the global financial crisis.
There's awareness of the threats posed by the European fiscal crisis as well as rising input costs, including higher currency costs, but many say they aren't seeing a meaningful hit to business yet.
"Everyone's talking about a bad outlook for the second half and early next year, but we're not seeing any signs from export orders," says Chen Shujun, board secretary at Zhejiang Golden Eagle, a manufacturer of machinery used for food production.
"The yuan exchange rate movement doesn't have much impact on our exports. We haven't seen any weakening in external demand either."
Stanley Lau, managing director of Renley Watch Manufacturing and deputy-chairman of the Federation of Hong Kong Industries, a business group, says orders are at "more or less at pre-crisis levels," even if those from Europe have dropped off by 10 to 15% since April.
"On the whole, business is still quite positive," he says. "We're seeing signs that it's picking up in the U.S. (and) although business from Europe has dropped, luckily we can compensate from other markets like the U.S., the Middle East and South America."
But analysts are sceptical that the good times can last without the impact from Europe being felt. Kenny Lau, head of small caps coverage at Credit Suisse in Hong Kong, says conditions have reflected an "overdraft of demand" as companies rushed to fill capacity in the first half in expectation of an increasingly solid economic recovery. That's changing now, he says. He notes that companies making goods for the mass market are seeing declining order volumes while some electronics companies are complaining that the third quarter -- typically their peak season -- is looking "sub-seasonal.""Business was exceptional so when we heard that European demand could fall 10% to 20% and about sub-seasonal demand in the third quarter, it wasn't a big surprise to me," he says.
"After a year of recovery, we're seeing a deceleration of momentum -- either mathematically or fundamentally."
Nagging cost issues are only complicating the outlook.
The much-heralded depegging of the yuan from the U.S. dollar in June hasn't brought significant currency appreciation in its wake. For all of the government's talk of a more market-driven exchange rate, the People's Bank of China still appears to be manipulating the yuan to shield the export sector.
But labor costs are a more immediate concern. Headlines about worker suicides in factories in southern China have focused attention on pay conditions in the manufacturing sector. Managers admit that wages are going to have to rise following sizeable adjustments by big employers such as Foxconn International, where the deaths occurred.
Local governments are also planning sizeable adjustments to provincial minimum wage levels in the coming years, in part to play catch-up after wages were frozen during the financial crisis.
Renley's Lau says rising wages will knock 1 to 2 percentage points off the net profit margins of his members ("they're now around 5 or 6% if they're lucky," he says).
Companies in the Pearl River Delta area, the traditional base of Chinese manufacturing located in the south of the country, are now faced with the option of moving to cheaper locations inland or passing on costs to their clients.
"If they read the news then I'm sure they can understand as well to agree to prices increases," he says.
Chinese exporters mostly defied predictions of devastation and survived the global financial crisis.
The last year has been exceptionally strong thanks to government protection, worldwide stimulus and the sharp rebound in growth which resulted from those measures.
As businesses struggle with risings costs and stimulus measures are withdrawn, Chinese companies face stronger headwinds over the coming months. "The actual hard data that we got out of not only China, but also Korea and Taiwan have been pretty encouraging over the last month or so, but I think there's a good chance that we'll see an impact emerge over the next two to three months," said Brian Jackson, Senior Strategists at Royal Bank of Canada in Hong Kong. "They're not out of the woods yet."
China's trade data for July is expected to be released August 10.
Thursday, 5 August 2010 04:54 am
by Connie Young
BEIJING (MNI) - Chinese exporters are seeing relatively brisk business despite evidence of slowing global growth. But the good times aren't expected to last, with evidence already building that European demand is flagging at the same time as rising costs hammer profit margins.
China's trade data have been surprisingly strong in recent months, even as European officials have struggled to contain a debt crisis that threatens to engulf the single currency project, and as the jobless recovery in the U.S. sputters.
But the data may reflect orders placed when the outlook was more rosy, leaving Chinese manufacturers anticipating a scramble to cut already pared costs or find new markets once reality hits home.
Guo Weizhong, manager at leather and knit apparel-maker Zhejiang Willing Company, says business conditions in the first half reflected orders made at the end of 2009, when the European outlook was brighter. The company is now trying to make up for lost business in non-traditional markets, Guo said.
"European conditions were more optimistic, so the direction of the economy was better and people ordered more," he says. "But people have realized that the direction of the economy actually isn't that great, so slowly we've seen orders gradually fall."
Manufacturers interviewed by Market News International say there have been few signs of business flagging after the sharp recovery following the global financial crisis.
There's awareness of the threats posed by the European fiscal crisis as well as rising input costs, including higher currency costs, but many say they aren't seeing a meaningful hit to business yet.
"Everyone's talking about a bad outlook for the second half and early next year, but we're not seeing any signs from export orders," says Chen Shujun, board secretary at Zhejiang Golden Eagle, a manufacturer of machinery used for food production.
"The yuan exchange rate movement doesn't have much impact on our exports. We haven't seen any weakening in external demand either."
Stanley Lau, managing director of Renley Watch Manufacturing and deputy-chairman of the Federation of Hong Kong Industries, a business group, says orders are at "more or less at pre-crisis levels," even if those from Europe have dropped off by 10 to 15% since April.
"On the whole, business is still quite positive," he says. "We're seeing signs that it's picking up in the U.S. (and) although business from Europe has dropped, luckily we can compensate from other markets like the U.S., the Middle East and South America."
But analysts are sceptical that the good times can last without the impact from Europe being felt. Kenny Lau, head of small caps coverage at Credit Suisse in Hong Kong, says conditions have reflected an "overdraft of demand" as companies rushed to fill capacity in the first half in expectation of an increasingly solid economic recovery. That's changing now, he says. He notes that companies making goods for the mass market are seeing declining order volumes while some electronics companies are complaining that the third quarter -- typically their peak season -- is looking "sub-seasonal.""Business was exceptional so when we heard that European demand could fall 10% to 20% and about sub-seasonal demand in the third quarter, it wasn't a big surprise to me," he says.
"After a year of recovery, we're seeing a deceleration of momentum -- either mathematically or fundamentally."
Nagging cost issues are only complicating the outlook.
The much-heralded depegging of the yuan from the U.S. dollar in June hasn't brought significant currency appreciation in its wake. For all of the government's talk of a more market-driven exchange rate, the People's Bank of China still appears to be manipulating the yuan to shield the export sector.
But labor costs are a more immediate concern. Headlines about worker suicides in factories in southern China have focused attention on pay conditions in the manufacturing sector. Managers admit that wages are going to have to rise following sizeable adjustments by big employers such as Foxconn International, where the deaths occurred.
Local governments are also planning sizeable adjustments to provincial minimum wage levels in the coming years, in part to play catch-up after wages were frozen during the financial crisis.
Renley's Lau says rising wages will knock 1 to 2 percentage points off the net profit margins of his members ("they're now around 5 or 6% if they're lucky," he says).
Companies in the Pearl River Delta area, the traditional base of Chinese manufacturing located in the south of the country, are now faced with the option of moving to cheaper locations inland or passing on costs to their clients.
"If they read the news then I'm sure they can understand as well to agree to prices increases," he says.
Chinese exporters mostly defied predictions of devastation and survived the global financial crisis.
The last year has been exceptionally strong thanks to government protection, worldwide stimulus and the sharp rebound in growth which resulted from those measures.
As businesses struggle with risings costs and stimulus measures are withdrawn, Chinese companies face stronger headwinds over the coming months. "The actual hard data that we got out of not only China, but also Korea and Taiwan have been pretty encouraging over the last month or so, but I think there's a good chance that we'll see an impact emerge over the next two to three months," said Brian Jackson, Senior Strategists at Royal Bank of Canada in Hong Kong. "They're not out of the woods yet."
China's trade data for July is expected to be released August 10.