Eye on China: First bras, now it looks like cars

The recent resolution of the Bra Wars, as the British tabloids have called the textile and clothing dispute between the EU and China, is by no means the end of the question of how the world can accommodate the growing flood of Chinese exports.

The textile dispute runs parallel to Italian concerns over Chinese shoe exports. But the Italians are not EU heavyweights like France, so the immense economic pressures Italian shoe producers are complaining about don't result in vigorous EU action.

Here the dual nature of the EU manifests itself.

While the rich, northern European countries have long outsourced their textiles and garment manufacturing, the poorer EU countries such as Greece, Portugal, Spain and Italy still need labour-intensive garment and clothing manufacturing (textiles are more capital intensive) to provide employment.

But these countries don't dine at top table.

Fortunately for them, at least in textiles, they have found a champion in France.

France is one of the richest and most advanced countries in the world but still has a significant textile and garments industry.

Indeed, it's easy to forget that the EU was the world's largest exporter of textile products in 2003. The EU is also the second-largest importer of textiles after the US.

On top of the shoe and textile disputes, we will probably soon be able to add cars.

The announcement by Chinese car manufacturers Geely and Brilliance that they will be showing cars at the upcoming Frankfurt International Car Exhibition, one of the top such venues in the world, must have been bad news to manufacturers.

One Chinese manufacturer, Chery, makes the QQ model, which it sells so far only on the mainland.

At a terrifyingly low US$5000 ($7100), international car-makers must be hoping they won't be facing the QQ any time soon.

A recent survey conducted in Europe suggested that European consumers would be interested in buying Chinese cars as long as they were at least 20 per cent cheaper than current models.

In fact, the QQ is at least half the price of the cheapest car sold in the EU.

How do the Chinese manage such low prices? The immediate answer in many quarters is currency manipulation.

Critics say that despite the revaluation on July 21 of the yuan by 2.1 per cent against the US dollar, nothing much has changed.

Indeed, the currency has strengthened fractionally since then.

Critics look at China's balance of payments and see that its total balance (the surplus on the capital account, which records capital flows, and the surplus on the current account, which records trade flows) shows a huge surplus, equivalent to 7.5 per cent of GDP. That's a huge amount.

But capital flows, comprising speculative capital flowing in to bet on a further yuan revaluation, foreign direct investment and portfolio investments, amount to fully one-third of the total.

These latter flows are thus not the result of trading profits coming from an undervalued currency.

The remainder is still a large amount of course. A current account surplus, by definition, supports the argument that a currency is overvalued.

That's because under a more market-based regime, strong exports lead to the currency becoming more expensive and, hence, making imports more attractive.

That quickly brings imports and exports into balance. But it needs to be pointed out that the impact of low wages in China is far more important than the level of the currency - and most EU manufacturers accept that.

The Italian shoe manufacturers I met don't waste time talking about the currency (possibly up to 20 per cent undervalued), which is the issue that the US tirelessly focuses on.

They simply point out that it costs them 2000 ($3500) to employ an Italian worker, compared with 200 in Eastern Europe, where a number of them have redeployed their factories.

But Chinese textile workers get between 40 and 80 a month.

So the Chinese currency would have to devalue by hundreds of per cent to compensate Europeans for the far cheaper labour costs in China.

The labour in China is not just cheap of course.

It's also relatively well-educated, non-unionised and situated in a relatively well-managed economy with decent infrastructure.

European manufacturers are not sure how to respond to the Chinese.

On the one hand, they fume about the lack of social security provisions that enables Chinese bosses to keep their labour costs down, but they are also tempted to set up similar sweatshops in China as a way of competing.

The Chinese are right to complain that the EU has had 10 years to prepare for the end of the quotas, announced in 1995.

But Chinese companies also benefit from cheap capital - money trapped in Chinese banks, because Chinese citizens aren't allowed to move their money offshore, and lent to friendly companies at low rates.

France and Italy are also bitter about intellectual property right infringements in the fashion sector.

It's all very well for the free-marketers in London to lecture shoe and clothes manufacturers about moving up-market and capturing fat new margins.

But moving up-market essentially means better design and it's precisely that which is being ripped off all over China.

* The writer remains anonymous to protect his position in China.

Gearing up

* Chinese car manufacturers will be showing cars at the upcoming Frankfurt International Car Exhibition.

* One Chinese manufacturer, Chery, makes the QQ model, which it sells for US$5000.

* European consumers are interested in buying Chinese cars as long as they are at least 20 per cent cheaper than current models.

* The QQ is at least half the price of the cheapest car sold in the EU.