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Cablegate: Yiwu: Mixed Picture for Chinese Exporters, Many Shifting

VZCZCXRO7810
RR RUEHCN RUEHGH
DE RUEHGH #0467/01 3031001
ZNR UUUUU ZZH
R 291001Z OCT 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7283
INFO RUEHBJ/AMEMBASSY BEIJING 2235
RUEHHK/AMCONSUL HONG KONG 1659
RUEHIN/AIT TAIPEI 1294
RUEHSH/AMCONSUL SHENYANG 1493
RUEHGZ/AMCONSUL GUANGZHOU 1472
RUEHCN/AMCONSUL CHENGDU 1501
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7877

UNCLAS SECTION 01 OF 04 SHANGHAI 000467

SENSITIVE
SIPDIS

TREASURY FOR OASIA/INA/CUSHMAN AND WINSHIP
DEPT FOR EAP/CM
USDOC FOR ITA/MAC DAS KASOFF, MELCHER, OCEA

E.O. 12958: N/A
TAGS: ECON PGOV ELAB ETRD EFIN EINV CH
SUBJECT: YIWU: MIXED PICTURE FOR CHINESE EXPORTERS, MANY SHIFTING
FOCUS TO DOMESTIC MARKET

REF: SHANGHAI 313

1. (SBU) Summary: Zhejiang Province's Yiwu, home to one of the
world's largest wholesale commodity markets, has experienced a
general downturn in its export-oriented economy. However, local
government officials remain cautiously optimistic, saying the
global economic crisis "presents a threat and opportunity" for
the city. Local manufacturers have experienced a decline in
profits due to RMB appreciation, decline in export tax rebates,
rising cost of raw materials, and higher labor costs, but some
have done better than others depending on the product and
destination market. Exports to developing countries have
generally declined less than exports to the United States and
Europe. Domestic sales are doing better than exports, and
executives at China's largest sock manufacturer and household
decorations company said they will expand their focus on the
domestic market. The interlocutors believe Yiwu will continue
to serve as a hub for the global trade of commodities due to the
cost advantages of consolidation. End Summary.

Background
-----------
2. (U) Econoff attended the annual Yiwu International
Commodities Fair October 21-23 and spoke with Yiwu government
officials, traders, shop vendors, and factory executives about
the effects of the global economic downturn on Yiwu's
export-oriented economy. Yiwu, a city of approximately 700,000
permanent residents and one million migrant workers, is located
in the interior of Zhejiang Province approximately 300km (3
hours by car or train) southwest of Shanghai. In only the past
15 years, Yiwu has grown into one of the largest wholesale
commodities trading centers in China, where traders from all
over the world gather to source every kind of commodity
imaginable, from socks and zippers to holiday ornaments and
electronic appliances. According to Yiwu Vice Mayor Li Xuhang,
these items are sold by approximately 62,000 vendors in shops
located in several football stadium-sized buildings four or five
stories high. (Note: An additional building was opened in
October, adding 1.7 million square meters to the existing 2.6
million square meters of market space. End note.)

Government Officials Cautiously Optimistic
-------------------------------------------
3. (SBU) According to Zhu Jun, Foreign Trade and Economic
Section Head of the Foreign Trade and Economic Cooperation
Bureau of Yiwu, Yiwu exports about 60 percent of its products to
over 200 countries worldwide. Its largest overseas market is
the United States, which accounts for 12 percent of Yiwu's
exports. (Note: Zhu said this figure is inexact since many
commodities are sold to third countries, which then ship the
finished product to the United States. End note.) Russia, the
Middle East, and Europe are also large export markets. Although
some factories have closed this year, Zhu thinks Yiwu
businesspeople still have "a lot of cash sitting around" and are
looking for investment opportunities both in Yiwu and overseas.
Vice Mayor Li believes the global economic crisis will have some
negative short-term impact on the local economy, but he
maintains a cautiously optimistic long-term view. He said the
crisis "presents a threat and opportunity" for Yiwu. Although
export volume in general has declined this year (Li did not
provide exact figures), Yiwu still maintains competitive cost
advantage in products in which "demand does not fluctuate very
much" (i.e., daily necessities like socks). Li also said
business has picked up in the post-Olympics period after visa
restrictions for foreign businesspeople were relaxed. Before
the Olympics, the local government had to check the visa status
for every foreigner in Yiwu and report any problems to the
Central Government, said Li.

Mixed Picture for Exporters
----------------------------
4. (SBU) Wang Yanqing, Director of the Yiwu Small Commodities
Trading Company, said the global economic crisis has had an
uneven impact on Yiwu's export economy. Her company is one of
several thousand trading firms in Yiwu that serves as a
middleman between Chinese manufacturers and overseas customers,
handling the sourcing, purchasing, and shipping of products.
Her company exports "all kinds of products" including shoes,
toys, accessories, and textiles to the United States, Southeast
Asia, India, South Africa, Saudi Arabia, and South America.

SHANGHAI 00000467 002 OF 004


According to Wang, local manufacturers in general have
experienced a decline in profits due to RMB appreciation,
decline in export tax rebates, rising cost of raw materials,
higher import tariffs in countries like Argentina, and higher
labor costs due in part to the Labor Contract Law implemented in
January 2008.

5. (SBU) However, the effect of the global economic downturn
depends on the product and destination market, said Wang. For
example, exports to the United States and Europe have generally
declined this year, but exports of photo frames, lamps, and arts
and craft products to Southeast Asia, primarily Malaysia, "have
been okay." Overseas demand for Christmas and other holiday
products has also been stable since "people have to celebrate
these things once a year."

6. (SBU) Wang has not seen many factories in Yiwu close due to
the economic downturn. Although profit margins have been cut,
factories feeling the squeeze have mostly shifted to different
products, she said. However, Ayoub Danka, Procurement Manager
at Euro International Trading Services, another trading company,
said he has seen several factories in Yiwu close or move to
Vietnam. Higher costs in China and preferential tariffs on
products from Vietnam by the United States and other developed
countries have caused many low-end manufacturers to move to
Vietnam, he continued. Ayoub Danka added that Yiwu may not have
felt the "full effect" of the global economic crisis yet, as
purchase orders from overseas customers are likely to continue
declining.

Shifting Focus from Exports to the Domestic Market
--------------------------------------------- ---------
7. (SBU) Executives at Mengna Socks Company, China's biggest
sock manufacturer, and Huahong Holding Group, one of China's
largest home decoration companies, said their companies have
felt the impact of the global economic crisis to varying
degrees. Zhou Xiaoli, Executive Director of Mengna Socks
Company, said his company exports about 60 percent of its
products, 20 percent of which goes to the United States. He
said the global economic situation has "not had much effect" on
their overall business and, although demand from the U.S. market
is down a little this year, total worldwide demand has been
pretty stable. "People will continue to buy socks," he said.
As a result of slowing export demand, however, the company is
looking to increase domestic sales in the future, and he
projects sales in 2009 to be 50/50 overseas/domestic. The
company is also looking to expand sales in other overseas
markets, especially the Middle East, where Zhou speculates more
people will start wearing socks as the region Westernizes.
Although RMB appreciation and rising labor costs remain
concerns, the company has made adjustments, switching to a
mostly automated line of production, thereby lowering labor
costs. (Note: During a tour of their factory, Econoff noticed
only one human operator per every few dozen sock-making
machines. End note.) Zhou was fairly optimistic about his
company's business, saying profits and rate of growth have held
steady.

8. (SBU) On the other hand, Anderson Gong, President of Huahong
Holding Group, was downcast about his company's business
prospects. His company, which makes picture frames, mirrors,
and wall decorations, exports 60 percent of its products to
large customers in the United States, such as Walmart, Target,
and Costco. The global economic crisis has hit the company
hard, as overseas demand and profits continue to shrink. RMB
appreciation, cuts in export tax rebates (Gong said the Chinese
Government's recent decision to lift rebates on some exports
does not help his company's products), and higher labor costs
(Gong estimates 20 percent increase in labor cost every year)
which he, too, attributed primarily to the Labor Contract Law,
have exacerbated his company's problems. Like Mengna, Gong said
Huahong also plans to increase its focus on the domestic market
with a target of 40/40/20 ratio in sales for the domestic, U.S.,
and other foreign markets, respectively, over the next two to
three years.

Yiwu Market: Some Vendors Doing Better Than Others
--------------------------------------------- ------
9. (SBU) A quick tour through Yiwu's commodity markets revealed

SHANGHAI 00000467 003 OF 004


effects of the global economic downturn vary across industries.
Econoff spoke with about twenty wholesale vendors selling
different products and observed the following trends: a) exports
have declined at least modestly across the board, but the degree
of decline depends on the product; b) exports to developing
countries have generally declined less than exports to the
United States and Europe; c) vendors selling more to the
domestic market than overseas were fairly optimistic about
business prospects.

10. (SBU) Toy vendors with a heavy focus on exports,
particularly to the United States and Europe, appeared hard hit.
They claimed sales were down significantly, with one vendor of
decorative stickers saying there was "absolutely no business"
this year. New products that would have been sold within days
last year have been lying untouched this year. On the other
hand, several vendors exporting thread, laces, shoes, and
curtains to Southeast Asia, Africa, and the Middle East said
exports were down a little this year but not by much. They also
commented that domestic sales were "stable." Several sock
vendors with mostly domestic sales said business was good,
explaining that they received large orders from regular domestic
customers.

11. (SBU) Several vendors selling Christmas ornaments and
decorations said business this year was generally in line with
last year. They export their products to the United States,
Europe, the Middle East, Africa, and Latin America. (Note:
According to Vice Mayor Li, 90 percent of Christmas ornaments
sold in the United States come from Yiwu. End note.) One vendor
said although exports to Europe declined a little this year,
exports to the Middle East and Africa have increased. They all
said exports to the United States were about the same, or maybe
slightly less, than last year. Echoing comments by Wang Yanqing
of the trading company, some vendors attributed the relatively
stable overseas demand to the fact that Christmas is a
once-a-year holiday that people celebrate no matter what. Some
vendors mentioned that domestic demand for their Christmas
ornaments and decorations is also picking up.

12. (SBU) Comment: Most of the market vendors, who are
small-business owners, appeared to have little knowledge of
specific economic factors affecting their export business. They
claimed to not deal directly with overseas customers, instead
relying on trading companies (like those of Wang Yanqing and
Ayoub Danka) to serve as the primary conduit for their overseas
sales. When asked about causes of decline in their exports,
many simply shrugged their shoulders and attributed it to "the
changing global economic situation." Several said they "do not
know why" customers were not buying their products this year.
Wang Yanqing of the trading company noted that the Yiwu
Government had recently launched an effort to educate vendors on
the economy and finance. There was little business activity in
the markets, with very few buyers. However, this may be because
the vendors rely on a few regular customers, both domestic and
foreign, who place orders in bulk through the trading companies.
As one vendor noted, "We'll be happy if we get one customer a
day to place orders." End comment.

Yiwu's Advantage: Consolidation
--------------------------------
13. (SBU) The interlocutors believe Yiwu will continue to serve
as a hub for the global trade of commodities. Some
manufacturers, like Mengna and Huahong, maintain factories in
Yiwu despite higher labor costs because, according to Gong, Yiwu
has advantages in its transportation and logistics
infrastructure. According to Wang Yanqing of the trading
company, however, most exporters based in Yiwu actually have
factories in other provinces. For example, most toys, lamps,
and electronic appliances are made in Guangzhou, shoes and arts
and crafts are made in Shandong, and glass products are made in
Shanxi. The average salary for a factory worker in Shandong
Province is about 1500 RMB/month whereas a factory worker in
Yiwu makes 2000 to 3000 RMB/month. Although transportation
costs have risen due to higher oil prices, these are outweighed
by the cheaper labor and material costs of the provinces. Wang
thinks this model of "manufacture in the provinces, consolidate
and ship from Yiwu" will continue. Ayoub Danka of the trading
company also thinks Yiwu's main advantage is consolidation. A

SHANGHAI 00000467 004 OF 004


foreign buyer can "ship a single container loaded with dozens of
different products" from Yiwu since "you can find anything
here." (Note: Zhejiang Province's Ningbo Port is China's fourth
largest in container throughput, while Shanghai, China's busiest
port, is just north of Zhejiang. End note.)

Comment
--------
14. (SBU) Econoff's observations in Yiwu were generally in line
with what we have seen across East China. Some exporters are
doing better, some worse, depending on the product and export
market, and the global economic crisis has forced many
manufacturers to focus increasingly on the domestic market.
Yiwu seems better placed than other export-oriented cities to
weather the crisis because of its scale.
CAMP

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