Weak Response at China Export Fair a Troubling Sign

The green, blue and brown picnic backpacks displayed by the Xiamen Tawa Enterprise at the Canton Fair here in recent days are ingeniously designed, with special pockets for vacuum bottles, silverware and matching cloth napkins.

Getty Images

But what the company does not have is many customers. Several staff members sat around the company’s booth on Friday, the last full day of the fair, and complained that their exports to Europe and the United States had dropped 20 percent over the last year and were likely to stay weak after few orders materialized at the fair.

“Over all, there are just fewer people coming by the booth,” said Randell Liu, Xiamen Tawa’s senior sales executive.

The Canton Fair, China’s biggest marketplace for exporters and buyers, announced over the weekend an unexpected decline in contracts signed over the last month at the fair’s spring session. The weak result was the latest sign that exporters across China are struggling to maintain their global competitiveness.

Falling export orders are also a warning for the Chinese economy because they coincide with steeply rising wages and higher rents for factory space, pushing many export factories to the brink of insolvency.

Difficulties in the export sector coincide with broader weakness in the economy since last winter, although there were hints of a slight recovery in March. The government has deliberately popped the country’s real estate bubble over the last year and is pushing apartment prices down sharply in an effort to make housing more affordable.

The decline in orders at the Canton Fair nonetheless caught traders and investors by surprise. China’s central bank pushed down the value of the renminbi against the dollar by 0.22 percent in setting the daily trading band on Monday morning for the Shanghai currency market, the largest one-day move in the renminbi since March 12.

“What we’re seeing here is a continued loss of competitiveness,” in combination with clear weakness in demand from export markets, particularly Europe, said Frederic Neumann, the co-head of Asian economic research at HSBC.

China is scheduled to release its April trade data on Thursday. Taiwan announced on Monday that its exports fell 6.4 percent in April compared with those a year earlier, more than double the decline of 3.1 percent that economists had been expecting.

Assessing the relative importance of China’s eroding long-term competitiveness and the short-term weakness of export markets is the subject of considerable disagreement among economists.

Chinese officials have argued that rising costs and a strengthening renminbi have produced an essentially permanent narrowing of China’s trade surplus.

The Obama administration and many members of Congress have been more skeptical, suggesting that weak demand from other countries has only temporarily blunted the long-term rise in China’s share of foreign markets.

The Canton Fair disclosed during the weekend that contracts signed at its spring session totaled $36 billion, a drop of 2.3 percent in dollar terms from the spring session last year and a decline of 4.8 percent from the session last autumn. The official Xinhua news agency said that it was the first year-over-year decline in Canton Fair contracts in dollar terms since the spring of 2009, at the bottom of the global economic downturn.

Chinese exporters must pay their workers and their rent in renminbi, not dollars. The slide in orders at the Canton Fair has been even steeper in renminbi terms because the Chinese currency has appreciated 3.4 percent over the last 12 months against the dollar.

This has made the decline in the volume of dollar-denominated export contracts at the Canton Fair even more painful for Chinese companies.

Weak orders at the fair contrast with a few signs of health in the export sector. The government’s purchasing managers’ index for export orders has been above 50, which signals increasing orders, since February.

A similar HSBC index of new export orders, which tends to capture more small and medium-size enterprises, moved above 50 last month. The Canton Fair tends to have a particularly heavy representation of small and medium-size exporters, who are being squeezed the most by rising labor costs as they tend to have invested less in automation.

A nationwide shift is also taking place toward higher-tech industries like electronics manufacturing, an industry in which the fair has somewhat fewer exhibitors.

Stanley Lau, the deputy chairman of the Hong Kong Federation of Industries, a trade group whose members employ 10 million mainland Chinese workers, said that the number of factories in export-oriented areas of southeastern China is steadily declining as costs rise. “China will still be the world’s center of factories, but it will not be the cheapest,” he said.

Not all exporters are ailing, however. Luxury goods vendors appear to be faring better, as affluent households have resumed spending.

Hongyuan Furniture Manufacturing, a 200-employee company based here in Guangzhou that makes $1,500 to $4,000 home saunas, using infrared light instead of hot rocks to warm occupants, had customers stopping by on Friday at its booth a couple halls away from Xiamen Tawa.

“Even though the economy is down quite a lot, our sales are quite stable,” with renewed strength emerging particularly in the American market, said Rachel Wang, the company’s sales manager. “From our customers, we hear the economy is picking up — it’s good news.”

But Mr. Liu was more pessimistic, and noted that Xiamen Tawa remained worried about the possibility of further pressure on margins if China’s currency climbed further. In negotiating longer-term supply contracts, he said, “we quote a little bit higher prices to protect ourselves against renminbi appreciation.”