SHANGHAI — Any day now, China's rapidly appreciating currency will break the key barrier of seven yuan to the dollar. Los Angeles-based Wessco International is dreading it.
Wessco makes toiletry kits, stationery, bags and beverage containers in China and sells them to airliners and hotels around the world. The company's sales come in dollars, and it pays Chinese suppliers, office rent and staff here in yuan. For years when the greenback was strong, such outsourcing kept costs low and profits up.
But last year, the Chinese currency rose nearly 7% against the dollar, and it gained an additional 4% in the first quarter.
"It means a lot of pain," said Petros Sakkis, Wessco's manager in Shanghai.
The yuan's rapid rise comes at a critical time for manufacturers in China, many of which are struggling with new labor regulations, soaring costs for workers and raw materials, the elimination of export tax rebates and tougher product-safety scrutiny.
In the past, foreign firms could cover increasing costs by squeezing their Chinese suppliers. But with the rise in the yuan and other costs, Sakkis says, that's tough to do today. "The rules of the game have changed."
The American Chamber of Commerce in Shanghai said 17% of companies surveyed recently planned to move some operations out of China. The study, by the consulting firm Booz Allen Hamilton, cited the appreciation of the yuan as a primary factor.
Recent reports indicate that thousands of factories in southeast Guangdong province, many of them working for U.S. businesses, have closed or moved elsewhere. Meanwhile, some Chinese businesses are refusing payments in dollars; others are breaking contracts saying they can't meet the terms because of the high yuan.
"If you're an export business [in China], your life stinks right now," said Erik Bethel, managing director of ChinaVest, an investment and advisory firm with offices in China and San Francisco.
It's been easier for U.S. businesses in China that serve Chinese customers. KFC and Starbucks, whose outlets dot Chinese cities, take in yuan at their cash registers. Foreign companies that are paid in yuan also have an advantage when buying certain commodities, such as rubber, that are priced in dollars.
But many export businesses, particularly those involved in lower-value, labor-intensive goods, are turning to Vietnam. Although its infrastructure isn't nearly as well developed, Vietnam has Asia's second-fastest-growing economy after China, with a large supply of cheap labor and favorable government policies reminiscent of China's earlier days.
