End of the Manufacturing Empire?

Bloomberg recently carried a report on China's move to limit exports of the lalor-intensive products. Will this, coupled with the charges over products " Made in China", mark the end of the Manufacturing Empire of China?

China to Limit Exports of Labor-Intensive Products  

By Li Yanping                                     
 
July 25 (Bloomberg) -- China will curb exports of cheap labor-intensive products to force manufacturers into making higher-quality goods, in a move to narrow the world's largest trade surplus and reduce environmental damage.                  

The Ministry of Commerce will expand its catalogue of processed goods subject to export limits in the second half of 2007, following the July 23 move to increase a levy for exporters, the ministry's industry director Wang Qinhua said today.                  

``The new policy will add cost and affect the cash flow of exporters, especially those engaged in the labor-intensive part of the industry,'' she said at a press conference in Beijing. ``Our calculation shows that the impact will force exporters to increase value to their products and upgrade their technology.''                  

China's record $112.5 billion first-half trade surplus has fanned tensions with the U.S. and European Union, flooding the world's fourth-largest economy with more than $1.3 trillion in foreign currency reserves. Cheap wages and lax environmental rules have attracted manufacturers, 50 percent of them invested by Hong Kong companies, to produce leather goods, electronics, metal products, toys and other goods for sales abroad.                  

``Every nation wants to upgrade its technology, especially at a time of increasing global competition and rising raw material costs,'' said Huang Yiping, Citigroup Inc.'s Hong Kong- based China economist. ``Many companies in China already have been moving up the technology ladder and value chain, and this new policy will only accelerate this process.''                  

Capital Requirement                  

China on July 23 said it would raise a levy on companies that import metals, plastic and textiles into China for use in products that will in turn be shipped abroad.                  

A total of 1,853 types of commodities including copper, lead, zinc and cloth will be added to the restricted category, requiring importers to deposit half of their payable levies including duty and value-added tax at the customs office, according to the trade ministry's statement.                  

The new limit may add about 8 billion yuan ($1.06 billion) to costs for exporters, 50 percent of which have been invested by Hong Kong-based companies, the commerce ministry's trade director Wang Jian said today.                  

``Hong Kong-invested producers will probably be the hardest- hit by this move,'' the ministry's industry director Wang said today. The trade ministry needs the move ``due to the changing international and domestic environment and China's promise to upgrade its industries,'' she said, adding the government will provide some aid and incentives to help Hong Kong manufacturers with the transition.                  

Killing the Growth Engine?                  

China's economy, expanding 10 percent every year on average since 1982, has been driven mostly by the so-called processing trade, in which companies import tax-deductible raw materials to turn into export products.                  

The proportion of processing trade has surged 333-fold over the past 25 years and accounted for 45 percent of China's total value of imports and exports in the first six months of this year, according to the trade ministry's data.                  

The government doesn't want to completely stop investments that have helped the economy balloon almost 40-fold in the past 25 years.                  

Manufacturers can be exempted from the exports limit if they shift their production to inland provinces including Shaanxi, Xinjiang and Gansu further away from the Chinese coast, part of a plan by the government to close the income gap between the wealthy coastal cities and the interior, Wang said today.                  

Western Region Exempted                  

``Processing trade manufacturers can alternatively move to central or western regions from the south and east coasts to be exempted from the export restrictions,'' she said. ``Production and labor costs are relatively low.''                  

China's 2008 trade surplus is estimated to increase 45 percent to a record $257 billion.                  

That's prompted some U.S. congressmen to draft legislation to force the Chinese central bank to let the yuan strengthen against the dollar. Some lawmakers have also called for laws to tie Chinese exports to the country's environmental and labor record.                  

In a series of moves this year, China lowered export incentives and increased tariffs to slow the pace of overseas sales and ease trade tension with major partners including the U.S. and the European Union.                  

The latest move to restrict exports also strike at energy- intensive industries with high amounts of emissions and effluents, in an attempt to reduce China's energy dependence and improve the country's environmental record. The policy may not be able to pare the trade record, said Societe Generale's Chief Asia Economist Glenn Maguire.                  

Buying Time?                  

``This buys some time politically but it's clearly supportive of a large trade surplus in the longer term,'' as manufacturers shift to higher-end products, Maguire said today in Hong Kong. ``China still has to allow the yuan to appreciate to ease excess liquidity in the economy.''                  

The yuan has strengthened 9.5 percent against the U.S. dollar since the Chinese central bank ended the currency's dollar link in 2005.                  

Some U.S. lawmakers deem the gain as insufficient. The U.S. Senate Finance Committee is set to consider legislation tomorrow to push China to raise the value of its currency.                  

The economy expanded 11.9 percent in the second quarter, the fastest pace in 12 years, backed by an 84 percent jump in trade surplus because exporters produced more and rushed their shipments ahead of a June deadline to curb overseas sales.                  

Separately, the National Development and Reform Commission, the Chinese government's top planning agency, said today the prevention of ``overheating'' is the most important policy goal in the second half of 2007, reiterating a government priority to curb inflation.