China’s implementation of new policies and deterioration of the international economic environment have combined to deliver a one-two punch to the Pearl River Delta.

China reduced export tax rebates on a wide range of industries in the second half of 2007, including for clothing, textiles, iron and steel, while a new labor law that took effect at the beginning of this year could raise the cost of wages.

With continuing renminbi appreciation and a slowdown of the US economy, enterprises in the delta are at the vortex of both internal and external pressures.

For many years foreign trade in the delta generated one-third of the nation's total, but its growth has now lagged the country's average for five consecutive years. A large number of local enterprises have closed down in the last two months.

Yuan appreciation

Among all China’s exports, about 80 percent are paid in US dollars. As the Chinese yuan continues to hit new highs against the dollar, exporting enterprises concentrated in the Pearl River Delta have suffered considerable losses.

“For every 1 percent in yuan appreciation, the profit of clothing industries decreases 4 percent, but the average profit margin in the industry is only 3.3 to 3.4 percent,” a clothing company manager was quoted by Shanghai Securities News (SSN) as saying.

In order to maintain profits “we may consider raising prices, but the risk is decreasing orders”, says another manager. “Many have already gone to India, Vietnam, Bangladesh, Pakistan and Indonesia.”

In 2007 the government faced an unprecedented $262.2 billion foreign trade surplus. In July the country adjusted export tax rebates on 2,831 commodities, some 37 percent of all Chinese exports, helping ease the trade imbalance, but worrying exporters.

Seagull, a listed company in Guangdong province that makes bathroom fixtures, suffered a year-on-year 48.79 percent decrease in net profit after the tax rebate rate was cut from 13 to 9 percent, the company said in its third-quarter financial report.

A local textile manufacturer complains that its profits were also seriously effected as “the abrupt adjustment left us no time to take responding measures” when it was interviewed by SSN.

Implementing the new labor law

China's new labor law that took effect in January aims to protect employee interests and regulate the labor market, but the benevolence was not welcomed by many entrepreneurs in the Pearl River Delta, as most of their companies are labor-intensive.

“If we provide each of our employees with endowment insurance, medical insurance, unemployment insurance and compensation insurance as the law requires, the cost is sure to increase,” the manager of an electronic equipment company in Fujian province says during the interview with Securities Market Weekly. “If we raise product prices to cover higher costs, our competitive strength will definitely be weakened.”

The law also adds challenges to human resource management. “Our employees hate overtime work for sure. But if I receive a pile of orders, the law will probably delay my delivery of goods,” says another local manager . “I think the law is ahead of time.”

US subprime mortgage crisis

US economic vitality has been seriously sapped, starting with the subprime mortgage crisis that began last year. Chinese exports, especially from Guangdong will inevitably be affected, since the US is its biggest market.

In the first quarter of 2007, Chinese exports to the US increased 20.4 percent compared with the same period last year. Growth then dropped to 15.6 percent in the second quarter and to 12.4 percent in the third, according to the Ministry of Commerce.

Many Guangdong enterprises say they believe more serious impacts are yet to come.

One is household appliance manufacturer Midea in Dongguan, which has lowered its export projections for air conditioners by 10 percent to 7.8 million units.

But government officials in the Pearl River Delta think the situation is not so bad. “The enterprises in danger are actually those with low added value, poor profits and backward technology,” they say.

“To some extent, these overlapping impacts spur enterprises to improve management and promote efficiency. In addition, they will accelerate improvements in the industrial structure,” an official says interviewed by SSN.

Measures are being taken by enterprises to tough it out. Many have moved their production facilities to Southwest China's Yunnan and Guizhou provinces, and even to foreign countries in South Asia, where labor and land costs are much cheaper.