Chris & Steve are leaving for China

Steve and Chris

click here for larger imageWell, “the boys” are off again – heading to the other side of the world (click on map at right showing our flight plan). I will be there for just 8 days, while Steve will be in China through August. As always, the purpose of this trip is to purchase for ourselves and our discerning clients. We will be visiting factories every day – the very ones that we’ve developed a relationship with over the past 10 years.

What we’ve learned in a decade.

The Chinese market continues to develop in interesting ways. More and more material is shipped from around the world to China for processing, as China continues to be the world’s largest finisher of dimensional stone. These international stones are specified for local buildings by international architects who are all doing work in China (see article). This means, the availability of material increases every time we go there – good news for our stone clients.

But costs are going up. Labor rates in China are rising; from 1998 through 2010, the average annual growth rate of real wages was 13.8%.  And there is considerable domestic inflation adding to costs of production and overhead. In addition, the fluid exchange rate alone has subtracted more than 25% from American buying power in the past decade. All this makes buying in China a harder challenge – no longer do you go to China just for cheap prices (I’ve been talking about this for several years – see my 2010 Newsletter “China Trade going the wrong way?“). Yet Steve & I continue to find niche materials and quality production which make China an essential part of your buying mix. And for cut-to-size, where there is a high labor content, China remains an excellent source.

Most purchasing in China remains a cash market.  So last week’s cash crunch is something we are watching closely.  Customers of some of China’s largest banks were not able to withdraw cash at ATMs in cities across China or use online banking platforms to transfer currency.  This recent cash squeeze in China’s interbank market was caused by rapid loan expansion at some banks.  To rein it in, the central bank refused to inject liquidity into the market despite a surge in interbank rates because it wanted the banks to adjust their practices.  Apparently the market got the message and they’ve already scaled back their balance sheets.  So, as of this morning (July 1st), interbank rates are falling.  But it still means borrowing costs for Chinese businesses will increase as tighter central bank policy designed to arrest the rapid growth of credit and crack down on shadow banking will further rein in aggressive lending (see article).  We’ll keep monitoring it to facilitate our client’s transfers and assure order processing in a timely manner.

The majority of China’s factories in the building supply business focus solely on the domestic market, and most don’t even have an export license.  That’s where the trading companies come in. If you just dealt with the few factories who can export directly, you’d eliminate 95% of Chinese production capacity. We act as an American owned trading company, with close contacts in China yet an intimate understanding of the needs of Western clients. This allows us to work with companies not able to export directly, yet who are producing much needed materials.

For those of you planning on visiting Xiamen this summer, please note that a large-scale road renovation project began on the busy Haicang Bridge on Tuesday, and is scheduled to continue until September 1st.  Most of the lanes will be closed for construction and traffic is advised to bypass the bridge or take public buses.  Plan lots of extra time and patience!

If we can help you include China in your purchasing plans, please let us know. You can always contact me at cjohnson@linley.com or by cell phone at 917-679-0073.

 Chris Johnson's signature

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