China Shows a Cheap Currency Doesn’t Pack the Same Punch Anymore

(Bloomberg) -- Chalk up China as another example where a cheapening exchange rate is failing to lift exports.

As already seen in Japan in recent years, what textbooks say should happen when a country's currency falls -- its exports gain -- isn't. Bathroom accessories maker Dongguan City XinChen Gift Co., in the southern Chinese province of Guangdong, is among those seeing one step forward, two steps back when it comes to the exchange rate.

"The support from a weaker yuan is negligible compared to the pressure we face from rising labor and materials costs," said owner Sandy Chang. "Foreign demand is already down. When growth is slow in our major markets, people just don't buy."

That tepid demand -- on display in September data that showed China's exports fell 10 percent from a year earlier -- means factories are yet to get a sustained shot in the arm from a currency that's weakened 9 percent against the dollar since August 2015. On a trade-weighted basis, the declines this year have been even more marked, with the yuan down 6.7 percent versus its 4.1 percent drop against the dollar in 2016.

"China's not going to get much out of anything from further currency depreciation in a weak global economy," Stephen Roach, a senior fellow at Yale University and former Morgan Stanley non-executive chairman in Asia, said in a Bloomberg Television interview. "You can cut your relative prices through depreciation, but if you don't have the external demand the impact is going to be limited."

With scant evidence the softer currency is doing much good for its vast manufacturing sector, officials and state-run media last week stepped up efforts to curb yuan depreciation concerns, talking up the currency as it traded near the weakest level in six years.

Shenzhen Kingston Sanitary Ware Co. illustrates the constraints. With sales denominated in dollars and most of its business in France, Germany and the U.K., a weakening euro has weighed on the business of the Shenzhen-based hot tub manufacturer, says sales director Cash Liu. The company's sales growth has fallen to single digits this year from 40 percent in 2014, prompting it to cut staff to 80 from 100, he says.

The weakening yuan also hasn't been much assistance to Jiangmen Luck Tissue Mfy, which is operating on razor-thin margins, according to deputy director Roger Zhao.

"Everybody knows the yuan is depreciating," he says. "So everybody asks for a price cut."

For a look at how rising prices are spurring China's factories to mull price increases, click here

That lack of any sustained boost was a common refrain across the long avenues of exporters interviewed in Guangzhou last week at the Canton Fair -- a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.

As the official data show, it seems the depreciation is at most cushioning the blow from a gloomy global outlook, not spurring a pickup in shipments.

Some at the Canton Fair have seen a boost from depreciation. Profits are up and it's also creating space to discount prices to make customers happier, says Yu Jinling, sales manager at Rogerlin, a bag maker in Quanzhou in the coastal province of Fujian. At Guangzhou-based clock maker Dannol Electronics Co. in Guangdong province, export orders jumped 10 to 15 percent after the August 2015 devaluation, said senior sales representative Fan Miaochang.

"It's a bright spot in the outlook," said Fan. "Further depreciation could help."

But for most, the near 50 percent rise in average wages from 2011 through 2015 far outweighed any near-term boost from a weaker yuan. As for XinChen Gift, annual sales have slumped to about 10 million yuan from about 40 million yuan in 2013 and 2014.

"It's been a real struggle this past year," said XinChen's Chang. "Some friends are moving their companies to Vietnam and I'm thinking about it because costs are cheaper there."

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net, Yinan Zhao in Beijing at yzhao300@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns

With assistance from Yinan Zhao, Kevin Hamlin