Despite the growing frenzy in the western media predicting the demise of China as a sourcing destination (see my recent blog post entitled “Reports of China’s death as a sourcing destination are highly exaggerated” ) the exports out of China continue to rise. It is my belief that China (as a country, not necessarily the current production base on the coast) still has at least 10 years left as the premier sourcing destination.
1. China’s coast (places like Shenzhen where I operate a few factories) are indeed getting more expensive as the central government tries to incentivize development of the interior by raising labor rates & taxes on the coast as well as a general desire to shift from export oriented production to a more domestic focus. Because China’s economy is still heavily export dependent at present, over the past years there have been concerns in the China government that promoting the interior too fast at the expense of the coast could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. BUT, as April data demonstrates to policy makers that the development of the interior is not having a major impact on exports. This could serve to encourage them to speed up plans already in place to incentivize business in the interior. This will mean that factories on the coast will need to adapt faster than many factory owners have expected. Overall, I believe a balanced economy with GDP that is generated in the interior as well as coastal areas, combined with the benefits of spreading wealth and resources more evenly across China are good for China and the world.
2. We can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA. China has not caved in to outside pressure on the exchange rate yet and I don’t expect them to change course anytime soon (unless it is to their benefit). And as buyers and consumers, we don’t want China to increase the exchange rate anyway.
3. Perhaps the most important “take away” from the article is that as foreign buyers we need to be expect that our Chinese suppliers will see this headline and think to themselves “we must be under pricing our product if exports still are rising.” As mentioned in other blog posts, I believe the “China Price” is far more elastic than most realize. The main reason buyers still buy from China as prices go up is that there simply is no “next China” where a buyer can get decent quality on a wide range of products at a reasonable price. So get ready for your suppliers to test your elasticity.
For more information, keep a watch for upcoming blog posts or read my book for tips on how to keep costs down in China.
Wishing you successful China Sourcing!
Author, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book/)