[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.]
By Keith Bradsher
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Workers at the Guangdong
Chigo Air Conditioning factory in Foshan, China.
The factory is bracing
for demands for discounts from overseas retailers
if the renminbi weakens
further. Credit Billy H.C. Kwok for
The New York Times
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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.’”
Ailin Tang contributed research.