SHANGHAI (Thomson Financial) - As China s factory floors feel the pressure from spiraling costs, there is growing nervousness in the rest of the world that the Asian giant s next big export could be inflation.
From air-conditioned US shopping malls to bustling African street markets and remote Asian villages, shoppers have become accustomed over recent years to the vast array of ultra-cheap Chinese goods on offer.
China s trade surplus last year reached 262.2 billion US dollars, a more than tenfold rise from 2003.
But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 percent in January, is ramping up the costs of doing business in China, with potential knock-on effects for the rest of the world.
As China s currency has strengthened sharply against the dollar, the government has scrapped export tax rebates, while more stringent labor laws and even the ice and snow storms in southern and central China have further driven up costs.
"China s inflation is having a domino effect on worldwide inflation, especially in the United States," said Li Huiyong, an analyst with Shanghai-based SYWG Research and Consulting.
"In the past, [outside] inflation pressures in the US mainly came from oil prices because the US economy is highly dependent on crude oil. Cheap products from China and other developing countries helped to alleviate that pressure.
"Now Chinese goods are no longer as cheap, it adds to the inflation pressure in the United States."
Nevertheless, while it is clear that doing business in China is getting more expensive, there is no consensus among economists about how much this will result in higher price tags for Chinese-made products overseas.
Wang Qing, chief China economist at Morgan Stanley, stressed that Chinese competitiveness is not about to disappear and that goods from Asia s most populous nation will remain cheap for years.
This would be the case as products moved up the value chain from toys and clothes to cars and high-tech machinery, according to Wang.
"I don t think the days of cheap Chinese goods are over. The inflation that China is experiencing now has a cyclical component. By that I mean the high inflation won t be sustainable," he said.
"What s more important is that you should not just focus on nominal wage growth. You also need to pay attention to labor productivity growth. That s why I think we shouldn t be too alarmed about this."
And given the long and complex business chain between suppliers in China and overseas consumers, a rise in manufacturing costs does not mean that shoppers will immediately have to pay more for Chinese products.
Alarm bells
Aside from cutting their own margins, factories and traders can first look to their customers, many of whom charge huge mark-ups on the wholesale price, to take on more of the financial burden.
For instance, the price of making a branded T-shirt in China may be just a few dollars, but they are typically sold in US malls for 10 or more times this price.
Companies intent on paying bottom dollar for their products could move operations to countries with cheaper overhead costs, such as Vietnam, Sri Lanka or Cambodia.
Alarm bells are definitely ringing in boardrooms across China.
Eating into exporters profit margins, producer prices jumped 6.1 percent last month to a three-year high.
Meanwhile, labor wages last year rose 20 percent and the yuan has appreciated more than nine percent against the US dollar in the past 14 months.
This has meant that more exporters face bankruptcy unless they lift prices to salvage their disappearing margins, which is just what most plan to do.
According to a survey by brokerage and research house CLSA, 80 percent of Chinese exporters intend to raise prices this year in response to higher raw material costs.
"The appreciation of the [yuan] against the US dollar is a secondary factor driving these price hikes," Shanghai-based CLSA economist Andy Rothman said in the survey report.
Yatta Mao, a trade manager at Shanghai-based chemical trading company Hanren, said the tighter business conditions that have emerged over the past year are making it difficult to survive.
"The yuan appreciation has a huge impact on our business. It costs us much more in the production and delivery costs. What s worse, the export tax rebates of 13 percent were canceled, so our total costs are up 20 percent," she said.
And in the southern province of Guangdong, which borders Hong Kong and is one of the country s main export hubs, there are deep feelings of pessimism.
Thousands of Hong Kong- and Taiwan-owned factories based in Guangdong are likely to close soon as they seek cheaper overheads elsewhere, said Alexandra Poon, director of policy research at the Federation of Hong Kong Industries.
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