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2017-03-01 23:33:04
For China’s Factories, a Weaker Currency Is a Double-Edged Sword

FOSHAN, China — At first glance, given the way that China controls its currency, the Guangdong Chigo Air Conditioning Company might seem like a winner.

For the past three years, China has allowed its currency, the renminbi, to weaken in value compared with the American dollar. On paper, that should bolster Chigo’s profits. Half of its $1.2 billion in annual sales come from abroad, mostly in dollars, and a weaker renminbi gives Chinese companies an advantage when they sell their products in other countries.

Yet the renminbi’s slide has provided only a marginal benefit, said Li Xinghao, the company’s founder and chairman. Big Western department store chains have learned to pit manufacturers against one another — and China is full of air-conditioner manufacturers. When the renminbi weakens, the chains simply tell factory bosses to cut their prices or lose the business to another Chinese factory.

“It only brings benefits for the first month,” Mr. Li said. “For the next month, clients are recalculating what they’ll pay. The supply is much greater than demand, so profits can’t go up.”

The renminbi is likely to be a major topic behind closed doors as Chinese lawmakers gather beginning on Sunday for the annual meeting of the National People’s Congress, the top lawmaking body in the country. President Trump had heavily criticized China during the campaign, saying that Beijing for many years used an artificially weak currency to unfairly help its businesses and steal American jobs.

Mr. Trump has not acted on a campaign promise to label China a currency manipulator, and Steven Mnuchin, the new Treasury secretary, has said the administration is conducting a standard review of China’s currency policy. Still, Mr. Trump has kept up his rhetoric.

Investors and economists widely expect market forces to push the renminbi to weaken even more. And that leaves China with some tough choices. If Beijing lets its currency slide, it will risk worsening relations with Washington.

On the other hand, a weaker currency would help its factories. But economists and business executives are increasingly throwing cold water on that thinking, saying the dynamic has changed: These days, they say, a weaker currency may hurt China and its companies more than it helps.

Chinese officials, who keep a tight grip on the currency’s value, appear to be aware of that. In recent months, they have kept the value from falling to 7 renminbi to the dollar, a level the currency has not seen since May 2008. Currently, it is hovering at about 6.9 renminbi to the dollar. That support is expensive — China has drawn nearly $1 trillion from its huge stash of foreign money to hold its currency steady.

The currency is under pressure to depreciate for a number of reasons. Among them: Families and companies are sending their money out of China, looking for safer places to store it as the country’s growth cools.

China keeps a tight rein on the amount of money that flows over its borders. But between the semiautonomous Chinese city of Hong Kong, which has a separate currency and legal system, and its neighbor on the mainland, Shenzhen, “there are thousands and thousands of smugglers, and they just bring billions of dollars” out of China, said Kevin Lai, the chief economist for Asia excluding Japan at Daiwa Capital Markets. A weaker currency could push more Chinese people and companies to send their money abroad, for fear of further losses if they continue to hold renminbi.

That isn’t all. The weaker currency makes it harder for many of China’s heavily indebted companies to pay off what they owe overseas or to raise more money. A weaker currency also does not pack the same competitive punch because so much of the world’s manufacturing base is now in China; four-fifths of the world’s window-mounted air-conditioners are made in the country, for example. Basically, a weaker currency is not as much help if a company’s competitors all use the same currency.

Today’s dynamic signals a big shift from a decade ago. Back then, Beijing kept the currency artificially weak compared with the dollar — and Chinese businesses benefited. A cheap and stable currency was one of a number of reasons that companies like General Electric, Mattel and Samsonite shifted production there. The shift gave China tens of millions of manufacturing jobs, stoked its economy and helped create a world power.

In time, it also helped nurture homegrown competitors. The Carrier Corporation — which has partly reversed plans to move some production from the United States to Mexico after coming under pressure from Mr. Trump — built seven air-conditioner factories in China more than a decade ago. But in 2008, Carrier put them into a joint venture with Midea, one of Chigo’s main rivals in the Chinese air-conditioner industry. Carrier said it still held 40 percent of the joint venture but declined to comment further.

The weaker currency still helps a number of companies, especially a small but growing group of Chinese companies that export specialized or high-quality products and compete with Western companies. One such Chinese company is Broad Air Conditioning, a maker of specialized central air-conditioning systems that are more energy-efficient but also considerably more expensive than most central air-conditioning systems.

“However much the U.S. dollar rises, our profits rise the same,” said Wu Zheng, general manager of Broad’s international operations.

But for most companies, other issues dwarf the currency. Wages have risen to the point where global manufacturers of low-cost items like shoes and clothing are shifting work outside China. Economic growth is slowing. Global trade has weakened. And in many industries, like window-mounted air-conditioners, a surplus of Chinese factories has undermined pricing and wiped out profits.

Chigo — which is headquartered in Foshan, on the outskirts of the city of Guangzhou — lost money from operations in 2014 and 2015. In the first half of last year, Chigo eked out a tiny profit as the renminbi began to tumble. It was briefly able to capture some gains from the currency’s depreciation before foreign retailers demanded price discounts.

Chigo sells air-conditioners in 180 countries, including outlets in the United States like Menards, a Midwest chain of home-improvement centers.

Three years ago, Chigo experimented with its own shift overseas. With wages rising at home, it chose two countries with even lower wages as well as steep barriers to imports: Nigeria and India.

Chigo found that in both countries, worker productivity was much lower while government corruption was a problem. In Africa, security was also an issue. A car carrying Chigo sales managers in Ghana was approached in broad daylight by two armed robbers who demanded the managers’ wallets and pistol-whipped their driver. Now its Indian and Nigerian operations have nearly shut down.

“In China, companies feel a sense of safety, which is already a huge support” for business, said Jackie Cheng, the vice president of Chigo and general manager for its overseas marketing. China’s high-speed rail network and its world-class network of new expressways also make it easy to do business, he added.

Persuading Chinese managers to live overseas is also difficult, Chigo found. “That’s serious,” Mr. Cheng said. “We can’t get used to the food outside, and many Chinese can’t really speak English.”

The factory in Foshan ran only four days a week late last year because of weak orders and overcapacity in the Chinese air-conditioning manufacturing sector. In interviews, some Chigo workers expressed irritation that this meant they earned less money.

But Mr. Cheng said that the company’s sprawling, 23-year-old factory had become busier in recent weeks as orders have risen. He attributed this mainly to an acceleration in the American and Chinese economies but also to the fall of the renminbi, which makes air-conditioners slightly cheaper and more affordable around the world and results in slightly greater demand.

Yet if the renminbi weakens further this year, as many economists expect, Mr. Cheng expects further demands from overseas retailers for discounts, coupled with threats to move orders to other Chinese air-conditioning manufacturers if Chigo does not comply. Frowning, he added, “Our clients have already told me, ‘The renminbi will reach 7.1. Please reduce your prices.’”