By staff reporters Yu Hai Rong and Wang Zhen

(Caijing Magazine) Does any hope remain for China's export industry, still the weakest link in the nation's economy after nearly a year of declining business?

As signs of a global economic recovery emerge, some see plenty of hope and are raising expectations for at least one, welcome month of growth before the end of this year. But others feel what's now a major restructuring for the global economy will prevent the export business from rebounding significantly in the foreseeable future.

Hot and cold opinions were on the minds of buyers, sellers and observers at the most recent China Import and Export Fair in Guangzhou, also known as the Canton Fair.

Floor activity at the autumn 2009 session of this semi-annual event – a multifunctional, comprehensive bazaar for Chinese manufacturers of all stripes, import-export companies, and hordes of foreign buyers – offered a glimpse at what could be expected for exporters in 2010.

Indeed, the level of activity at the more than 50-year-old Canton Fair has been likened to a barometer for foreign trade. And based on conversations with fair participants, Caijing found that global economic trends, currency exchange rates, raw material prices and customer payment risks are among the factors affecting forecasts for the export sector in coming months.

For now, the barometer needle appears to be pointing toward "change" – the area on a barometer's face between "rain" and "fair."

Recovery Signs

On the fair floor in mid-October, representatives of participating companies reported increasing numbers of buyers and larger-than-usual crowds.

"This session of the Canton Fair had significantly more people than the previous two sessions," said Feng Bin, general manager for Chunlan Import and Export Co. Ltd.

Chunlan exports decreased this year from 2008, but Feng said he is confident exports will recover in 2010. The trend for the coming year, he said, will depend on sales in November and December.

Appliance maker Galanz Group noticed a significant improvement in recent export levels. Liu Guizhong, general manager for the company's international expansion department, told Caijing that microwave exports set a monthly record in October.
 
During the first half of the year, Galanz's exports decreased 20 percent from the first half 2008. Compared to 2008, third quarter exports increased slightly, and fourth quarter exports increased more than 80 percent.

"This might have been caused by importers seeing that the retail market has recovered, and (may be due to) business restocking after the holiday season," Liu said.

Many foreign visitors at the fair were upbeat as well. According to one Middle Eastern businessman, the market in his country is gradually recovering.

Nevertheless, the crowds and improving trends did not overshadow caution among some companies about 2010 export forecasts. Some noted that, although the fall session drew more people than last spring's fair, traffic was still below pre-recession levels.

"We expect export conditions to improve next year, but the recovery will take time," said Hong Yu, chairman of Shenzhen Marshell Green Power Co. Ltd. "Many people are here to make inquiries, and very few are placing large orders.

"It's mainly people from Southeast Asia and the Middle East," Hong said, "and not as many from developed countries."

Li Decheng, a representative from Guangzhou Tianma Group Tianma Motorcycles Co. Ltd., reported no new customers at the session, and said returnees were bargaining for lower prices.
 
Some companies sent representatives to the fair to gather information, not place orders.

Chen Zhaoren, the fair's deputy secretary and spokesman, said October 20 that the number of international buyers had increased 5.4 percent over what was seen at the fall fair 2008. But total deal volume decreased 5.3 percent.

Orders for machinery and electronics totaled US$ 13.45 billion, accounting for 86.4 percent of all deals and up 20 percent from the spring session. Brand-name companies were generally more successful than others, with US$ 6.9 billion in business, up 32 percent from last spring session and accounting for 44 percent of total deal volume.

Three appliance companies -- Galanz Group, Midea Group and Haier Co. Ltd. -- together snagged US$ 1.98 billion in deals during just four days of the fair, which represented nearly 20 percent of all machinery and electronic products deals, according to the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

Orders for appliance makers TCL Corp., Hisense Kelon Group and Gree Electronic Appliances Inc. exceeded US$ 100 million each. The sum of deals from the top 10 companies totaled US$ 2.86 billion -- 29.7 percent of the total. In the metals, minerals and chemical product categories, total deals for brand-name companies increased more than 40 percent compared to the spring session.

The largest number of buyers came from Hong Kong, Malaysia, Iran, the United States and Taiwan – a list that reflects current trends for the mainland export market.

Air conditioning exports to Europe decreased dramatically this year, said Liao Yu, overseas marketing operations deputy general manager for air conditioner manufacturer Chigo Group. But Liao said sales of these appliances grew more than 10 percent in the Asia-Pacific region, Middle East and Africa. 

Ouyang Jun, Gree's head of India Operations, said his company's shipments to buyers in Africa, South America, South Asia, Southeast Asia and the Middle East would rise in 2010. But exports to the United States would "remain the same."

Song Hong, director of international trade research at the Chinese Academy of Social Sciences' Global Economy and Politics Research Institute, told Caijing that exports from China have been rising steadily, with year-on-year and month-on-month numbers improving, indicating that stability is gradually returning in the post-financial crisis period.

Nationwide data released by the General Administration of Customs on October 14 showed imports and exports in September had rebounded to above US$ 200 billion. The pace of recovery for imports and exports that month exceeded market expectations. 
Exports in September totaled US$ 115.9 billion, up 14.2 percent from August but 15.2 percent below September 2008, making it the best month so far this year. For the first time since October 2008, imports surpassed US$ 100 billion, reaching US$ 103 billion, 17 percent higher than in August and down just 3.5 percent from September 2008.

The fair opened with new, generally favorable data on foreign direct investment in China. FDI reached US$ 7.9 billion, up 18.9 percent from September 2008, the largest increase so far for 2009 and the second month for improvement. Because FDI has such a large impact on exports, this data is often interpreted as most significant for Chinese exports.

Researchers at China International Capital Corp. said that signs of economic recovery in developed countries and favorable leading indicators from OECD countries suggest the Chinese economy will continue to recover over the next three to six months. As the global economy further recovers, they say, China's exports in the fourth quarter and 2010 will continue to improve.

Forecasts for 2010 generally agree exports will rise, with growth rate predictions ranging from 10 to 20 percent. But even if exports grow 20 percent next year, the number still would be below the 2008 level.

Lingering Concerns

Officials from a Jiangsu Province trade group at the Canton event said deal volumes rose mainly because the global economy had showed signs of recovery.

However, unless businesses are sure of that an economic recovery is under way, the timing for investment decisions will be tricky, Feng said.

For Sheng Chengzhong, sales director at Taizhou Fangle Auto Parts Co. Ltd., the biggest worry is currency values, since a weakening dollar has put pressure on the yuan to appreciate.

Fangle specializes in steering wheels, and its main competitors are in Italy. The company has an edge with lower prices. "Italian products are generally 20 to 30 percent more expensive than Chinese equivalents," Sheng said. "But as the yuan appreciates and price differences decrease, foreign businesses will turn to better-quality Italian steering wheels."

A separate trend is affecting China's motorcycle makers, who used to merely compete against one another for domestic sales. But the yuan's appreciation in recent years has opened the door to a few Indian motorcycle companies. Li expects continued appreciation of the yuan will bring more competitors from other developing countries, putting more pressure on Chinese motorcycle companies.

Lin Lan, vice chairman for exports at Hisense Kelon, also feels that since the United States is the world's largest consumer market, companies should prepare for an appreciation of the yuan against the dollar.

For now, exporters need a strategy that anticipates future currency movement. "There are two solutions: One is to finance locally in the United States in order to mitigate risks involved with exchange rates, and the second is to lock the exchange rate as soon as an order is placed," said Lin.

Xiao Youyuan, general manager of overseas marketing for Gree, is more worried about rising prices for raw materials than yuan appreciation. Since the financial crisis began, prices have decreased substantially, giving companies room to breathe. But that could change soon.

Shenzhen Marshell's Hong said lead prices have fallen 40 percent since last year, while customers are demanding cuts of 20 to 30 percent. But if raw material prices increase quickly, companies that slash product prices now could be squeezed. Electrical appliance companies have bought futures for lead, aluminum and other raw materials to mitigate this risk.

The financial crisis also increased risk for companies trying to collect payments from overseas buyers. Liao said buying on credit has risen among customers lacking cash. And although many export companies are insured by the China Export and Credit Insurance Corp., they are not risk-free.

"We are in a buyer's market right now," said Feng.

Buyers have greater bargaining power with regards to conditions for payment, and this will not change in a short period. China's bad debt rate for exports remains around 5 percent a year, while most developed countries generally report rates of around 0.5 to 2.5 percent.

Trade protectionism has also cast a shadow over Chinese exports. Some tire manufacturers at the fair were hoping to break into new markets following lost business in the United States as a result of recent protectionist measures, but the number of deals was low. Sheng worries that steering wheels also may face trade barriers.

Meanwhile, the Chinese government is signaling support for the export sector. Manufacturers of copper pipe are rumored to be potential recipients of government stimulus aid.

Trade group representatives in areas such as Jiangsu Province and Shandong Province said supportive government policies may help exports turn for the better. They hope the government will not withdraw these policies too soon.

Since August 2008, for example, the government has increased tax rebate rates for certain exported products seven times. It's also revised the process trade "restrained" list twice, changed the process trade guarantee deposit from "actual transfer" to "notional," lowered inspection costs for exports, and lowered export credit insurance rates while expanding coverage.

Vice Minister of Commerce Yi Xiaozhun voiced support for stable foreign trade policies. "The Ministry of Commerce must take caution when withdrawing from export and foreign trade stimulus policies," he said.

Full article in Chinese: http://magazine.caijing.com.cn/2009-10-25/110293910.html