This two-part series discusses the current challenges being faced by importers of Chinese goods (particularly retail fixture providers) and the swiftly-changing landscape of Chinese exportation. The first part, governmental controlled input factors, will be followed by Part II – Market-controlled input factors.

Part I - Governmental Controlled Input Factors

It continues to be The Nu-Era Group’s privilege to provide each of our clients with retail products procured around the world. As you know, we are experiencing unprecedented changes in the global marketplace and governmental policy shifts that have changed the financial truths of doing business in China. This is no doubt a direct result of the Chinese industrial revolution. According to BBC News, in 2004 half of the concrete used in the world was poured into China’s cities. The same source reported that in the next 25 years 345 million people will move from rural areas of China into industrialized cities. The landscape is indeed literally and figuratively changing.

China’s economic growth has it poised to become the world’s largest exporter in coming years, and the government maintains control of two major factors that directly impact the price of goods being exported: the RMB exchange rate, and the value added tax reimbursement rate. Recently, we have seen substantial changes in both.

A frequent conversation among peers at GlobalShop this spring was the decrease in the RMB exchange rate. This is a major costing factor for any organization conducting business in China. For many years the rate was pegged by the Chinese government at anywhere between 8.4 and 8.1 (i.e., 1 USD is equal to 8.4 RMB). This rate was highly predictable from year to year and helped establish Chinese exporting capabilities. However the last several years, particularly the last 18 months, have shown an unprecedented sharp decline.

To give you a better idea:

Exchange rate RMB: US$ 1995 2005 2007 2008 Current as of 06/18/08
  8.46 8.27 7.80 7.27 6.883
% decrease year to year   2.2% 5.7% 6.8% 5.3%
Decrease from 2005     5.7% 12.1% 16.8%

What we are seeing is a concentrated effort on the part of the Chinese government (at the request of the U.S. government) to “right price” goods from China. Below is a forecast according to a May 6, 2008 briefing of Economist.com.

Exchange rate RMB: US$ 2009 2010 2011 2012
  6.55 6.30 6.1 5.92
% decrease year to year 4.8% 3.8% 3.2% 3%
Decrease from 2005 20.8% 23.8% 26.2% 29.4%

It is important to keep in mind that China remains a competitive source for procurement. What we are seeing is a reduction in the price disparity between domestic- and foreign-produced goods. However, although the percentage variances presented above can be unsettling at first; everyone is experiencing the same pressures. For the near future, Chinese-manufactured products will continue to deliver lower costs than domestic goods despite the RMB’s appreciation, but we need to be aware of government-controlled aspects of costs to continue making educated purchasing decisions.

The latter of the two government-controlled areas of costing is the value added tax reimbursement. VAT rebates for exporters, coupled with a generous RMB exchange rate, made (and still make) for a favorable importing environment. In an effort to stem its ballooning trade surplus, the Chinese government significantly lowered VAT rebates for thousands of export categories last summer. Much like the RMB exchange rate, the Chinese VAT rebate was a figure that stayed approximately the same from year to year. Originally 15% in 1997, it plateaued around 13% from 1997-2007. Recently, the government made the decision to lower the reimbursement, and it was dropped to 5% in 2007. Many economists are forecasting that it will be eliminated before 2009.

So what does this mean?

If, in 2005, you bought a market basket of goods for $1,000, and we ignore all raw material movements (to be discussed in Part II), you could expect that same basket of goods to cost $1,342.86 in 2008 as a result of these two government-controlled levers.

The unusual aspect of all of this is the scale and the suddenness with which these two factors have changed. Our experience tells us that China has been and continues to be an intelligent source to procure retail displays, but the Chinese economy is radically changing, as is the paradigm in which we must operate to achieve the economic gains globalization has to offer.

Andrew Sharon
President
The Nu-Era Group
www.thenueragroup.com

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