Treasury Secretary John Snow and many in the Bush administration have urged China to do it. So have Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C. And Sen. Dianne Feinstein, the California Democrat, has too.
They all want China to revalue their currency, the yuan, which many claim is worth far more than what it currently trades for. The stakes are big, according to China currency critics.
The U.S. ran a $162 billion trade deficit with China in 2004. From a sales standpoint, an increase in the value of the Chinese yuan would make exports to China more competitive. But for companies with production in China, an appreciation of the yuan would raise their costs there since they pay their workers in yuan.
Orange County companies that trade with China,the county’s fifth-largest trading partner,are watching closely. Researchers at California State University, Fullerton, expect China to leapfrog Taiwan and Canada this year to become OC’s third biggest export market, next only to Japan and Mexico. The university predicts exports to China to grow 46% to $930 million in 2005.
It’s not clear how the issue will shake out,China refuses to budge and the Bush administration has toned down its rhetoric of late. Regardless, OC companies say they won’t change their strategy or move production out of China if there is a revaluation.
“Where are you going to move where you don’t have currency fluctuation?” said Marshall Wright, chief operations officer for Irvine power supply systems maker Elpac Electronics Inc. The company has a plant in Shenzhen, China, near Hong Kong.
“China would still be competitive enough,” he said.
At 8.3 yuan to the dollar, many U.S. manufacturers and protectionist legislators contend China’s currency is undervalued by as much as 40%. They want China to let the yuan trade on currency markets so that it can move to its “correct” level rather than float with the U.S. dollar.
Officials at Irvine chipmaker Microsemi Corp. report that sales this year to China are showing brisk growth.
“Sales in China are on pace to double what they were last year,” said Ralph Brandi, Microsemi’s chief operating officer.
The company has a Shanghai plant with 60 workers. Microsemi owns a 60% stake in the plant, with Shanghai Electric owning the rest.
Brandi said he doesn’t think China will let its currency fluctuate too much.
“They have shown a lot of control in how they have gone from (pure) communism to being more like we are,” Brandi said. “They are doing things very gradually.”
For now, Microsemi’s China operations aren’t big enough to see a huge effect from a revaluation, said Chief Executive Jim Peterson.
Elpac’s Wright said a revaluation would hit the company’s bottom line.
“We pay our 130 Chinese workers in yuan,” he said. “So if the yuan goes up by 35% then our labor costs go up by 35%.”
China is the centerpiece of Elpac’s global strategy,almost all of its production is there with most sales in North America and Europe. The company has 63 workers in Irvine.
A few years ago Elpac moved its production to China from Mexico, largely because the labor costs in China are so much lower.
Wright virtually has ruled out shifting production away from China if the yuan appreciates, but that doesn’t mean he hasn’t considered it.
“If China isn’t cost competitive enough we would move to India,” Wright said.
Lake Forest disk drive maker Western Digital Corp. is another company that said sales to China are booming. The company’s unit shipments grew 150% in China in the 12 months through March 31.
“This has more to do with our performance in China than China market size growth, but both are factors,” said Western Digital spokesman Steve Shattuck. “China is a very fast-growing market for technology. We’re seeing high growth rates for PCs as well as other electronics. The scope of the China market is tremendous.”
Chip designer SRS Labs Inc. in Santa Ana has a unit in Hong Kong that ships to China. The company makes and licenses chips that improve sound systems in computers and consumer electronics.
About 40% of SRS’ chip sales are to China and about 10% of its licensing revenues come from China. (SRS draws half of its total sales from chips and half from licensing.)
“I was just in Hong Kong and the message from the Chinese side is that they are concerned about changing the currency too rapidly and without a moderating period,” said Thomas Yuen, SRS’ chief executive. “It may seem like China is doing very well economically. But China, in fact, remains a very poor country. So to effect a currency change now at too rapid a pace may have too many consequences.”
He said worldwide semiconductor costs wouldn’t move much if the yuan is revalued.
“China’s semiconductor industry is still in its infancy,relatively few U.S. companies have foundries there,” Yuen said. “The majority of semiconductor products are made in Taiwan and the U.S. And basic materials like silicone and sand aren’t sourced from China, so a rise in the yuan would not substantially affect semiconductor costs.”
SRS and its Hong Kong unit, ValenceTech Ltd., posted sales of $21.6 million last year.
Any bid to let the currency fluctuate is likely to be limited, said Esmael Adibi, director and professor of economics at Chapman University in Orange.
“They do not want it to go to a fully flexible exchange rate,” Adibi said. “They probably would start with a band.”
Say, for instance, that $1 U.S. equaled 8 yuan. China, Adibi said, would allow the currency to trade between 7.7 and 8.3 yuan to the U.S. dollar under a band system.
But Adibi agrees with Federal Reserve Chairman Alan Greenspan’s recent statement that a revaluation isn’t likely to ease the deficit.
“Producers in China will not mind giving up a little bit of a profit margin to continue to sell to us,” Adibi said. “In the past when the Japanese yen appreciated a lot it never affected our trade deficit.”
Greenspan has said U.S. consumers also would look to cheap producers in Malaysia and Thailand if prices on Chinese imports got too high.
