Currency fight with China divides US businesses

ZHUJI, China – For US business, the ongoing currency dispute with China is a two-sided coin.

On the tails-we-lose side are companies like New York-based PS Brands, one of the biggest US importers of socks. With the Obama administration pressing China to raise the value of its currency, the cost of Chinese-made socks is likely to rise. So PS Brands’ main supplier here is demanding shorter contracts at higher prices.

“Before, I could price six months out,” Elie Levy, chief executive of PS Brands, said during a recent factory visit here. “Now they only want to price 30 or 40 days out because the dollar could lose value.”

For the heads-we-win side, look to a US company 14,484 kilometres away, in Irvine, California, where the prospect of a weaker dollar is actually good news.

There, Staco Systems, a maker of aerospace electronics, has a growth business selling parts to state-owned aviation companies in China. If anything, a stronger Chinese renminbi would make Staco’s products even more attractive to buyers in China.

PS Brands’ problems, contrasted with Staco’s opportunities, make clear why US businesses are far from unified on whether Washington should be waging a currency fight with China.

US monetary policy has already caused the dollar to drop in value this year against most other major currencies.

But the dollar’s value has fallen only modestly against the renminbi. That is because Beijing has kept the renminbi artificially low by pegging it to the dollar – instead of letting it float to its market level, as most other global currencies do.

Beijing’s critics say the artificially low renminbi, by making Chinese exports cheaper than they otherwise might be, has helped China run up its huge trade surplus with the United States and much of the rest of the world.

At the Group of 20 summit meeting in Seoul, South Korea, recently, President Barack Obama chided China on its currency policy, calling for Beijing to “act in a responsible fashion internationally” and saying the undervalued renminbi was “an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world.”

Beijing countered that between 2005 and 2008, when the value of the renminbi rose by about 20 per cent against the dollar, it had little braking effect on the soaring US trade deficit with China. Chinese officials say Washington is simply searching for a scapegoat.

“China will do its best to manage its economy, and never blame others for its own problems,” China’s president, Hu Jintao, said on his way to the Seoul meeting.

Big US multinational manufacturing companies can feel the pinch of dollar-renminbi fluctuations. In many cases, though, they have set up operations in China and elsewhere that let them hedge by doing business in local currencies.

But currency exchange rates are a much bigger factor for the many small and midsize US companies that still manufacture onshore, like Staco. They tend to embrace a dollar policy that would make their export prices lower.

Meanwhile, the US companies most likely to oppose Washington’s currency fight with Beijing are businesses like PS Brands – Walmart would be another good example – that get their goods from China and sell them in the United States. Those companies’ balance sheets are likely to suffer, and US. consumers more likely to feel the effect, when the cost goes up on Chinese imports – whether socks, sofas or smart phones.

What often gets lost in the heated rhetoric, though, is that US and Chinese officials actually agree in principle that more balanced trade is healthier for the global economy. Where they diverge is on how fast to get there.

The Obama administration wants fast action because it worries that the growing US trade deficit will continue to threaten jobs and economic growth. But Chinese officials worry that letting the renminbi rise too quickly would bankrupt coastal factories that price their goods in dollars and that already operate on thin profit margins, destroying tens of millions of jobs.

As a result, Beijing has allowed the renminbi to rise against the dollar only moderately, by about 3 per cent this year. China’s critics say it needs to rise by as much as 20 per cent more.

The challenges to both sides are evident here in Zhuji, two hours south of Shanghai, where Levy arrived recently to negotiate the purchase of about $1 million worth of socks.

PS Brand, which had $58 million in revenue last year, is a private company with 35 employees. Its Chinese supplier is Shuangjin Knitting and Textile, which operates a 27,871-square-metre factory here that will produce about 43 million pairs of socks this year. Dealers like PS Brands distribute those socks to customers like Walmart, Adidas and Disney.

On the crisp, autumn day of Levy’s visit, about 75 workers were busy stitching, sorting and packaging thousands of socks headed for America, including labels featuring the cartoon character “Dora the Explorer.”

The factory’s boss, a friendly, 41-year-old entrepreneur named Yang Tiefeng, boasts that he has sock manufacturing down to a science. His facility can churn out 5,000 pairs of socks every hour at a cost of about 25 cents a pair, he says, which at current exchange rates still leaves him a tiny profit.

Analysts say those socks retail in the United States for about $2.99, with the difference divided among shippers, middlemen, marketers and the retailer.

But even without the currency fight, the economics of sock-making here are shifting. This year, labour shortages in China’s booming coastal factory towns have pushed up factory wages. And skyrocketing cotton prices, propelled by bad weather in cotton-producing regions, have been an even sharper blow.

During a tour of his factory recently, Yang said the prospect of a strengthening renminbi and a weakening dollar would create more hardship. Most Chinese factories sign long-term contracts in dollars, and if the dollar slides, factories here lose.

“It’s unfair,” Yang says.

Not surprisingly, Shuangjin’s recent negotiation with PS Brands, its biggest US customer, was tense. Levy warned that big retailers back home were pressing him to hold down costs in China because of weak spending by US consumers. Yang countered that he was strained by the soaring cotton prices.

After the talks ended, Yang walked into a conference room and exhaled. He declined to divulge details, saying only that a deal had been struck.

“That was tough,” he said, noting that currency was a major sticking point. “I told my clients today, ‘If you want to order, do it today, because if you wait the price will be different.”’

One thing Levy and Yang agree about: it is only a matter of time before pricing pressures in factories like Shuangjin’s result in higher consumer prices for Americans.

The mood is distinctly different at Staco Systems’ factory in Irvine, where Staco is building airplane cockpit gear for a state-owned Chinese company named Avic.

The United States long ago surrendered most low-skill manufacturing and assembly to China. But many higher-technology components, like microchips and specialized tools, are still made in the United States.

At Staco’s factory, workers blend precious metals, like gold and silver, with complex plastics to create button and switches for plane makers like Boeing and Airbus. The switches, which must be durable enough to withstand military demands and have special optics for all types of lighting conditions, are often priced as high as $500 each.

In the past two years Staco has expanded its payroll, to about 100 employees now, and it is selling to China’s fast-growing aviation industry. And with the dollar’s value declining against other currencies, Chinese buyers can afford more of Staco’s gear, as its prices are increasingly competitive with European companies’ products. “China will be our fastest-growing market over the next few years,” said Jason Childs, vice president for sales and marketing at Staco Systems, which is privately held and had revenue of about $20 million last year.

That, in a microcosm, is what US officials want from a stronger renminbi relative to the dollar: more exports and job creation.

But Levy at PS Brands says the rise of the renminbi is going to have cruel side effects: job losses in America’s retail sector and higher prices for consumers.

“This is hurting the US consumer who can afford it the least,” Levy said. “If people are struggling, how are they going to pay more for socks?”

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