Talking Business: Seeing The Sights Of Industrial China: 2 Factories, 2 Futures

SHANGHAI

“The RMB is killing me,” groaned Jin Jue.

Mr. Jin, a hip-looking 35-year-old with spiky hair and an all-black ensemble, describes himself on his business card as the “board chairman” of the Shanghai Jinjue Fashion Company. It was my first full day in China, and Mr. Jin was showing me around his factory on the outskirts of town.

RMB, of course, is shorthand for renminbi, the Chinese currency, also known as the yuan, which, since the beginning of the year, has risen more than 4 percent against the declining dollar. Even as the Chinese economy has become increasingly powerful, the government has kept the yuan artificially low, much to the annoyance of the United States. Truth to tell, it is still not nearly as high as it would be if it were unmoored from government control. When the Treasury secretary, Henry Paulson Jr., was in Beijing this week, he praised the recent rise of the yuan though — as he invariably does when he’s in China — he called on Chinese officials to let their currency float freely.

This is my first trip to China and, like most Americans, I had an image of what a Chinese factory looked like. Mr. Jin’s operation fit that image almost to a T. It was housed in a run-down building amid a sea of run-down buildings in the Kun Shan industrial zone, just northwest of Shanghai. Except for Mr. Jin’s own office, it was really just one cavernous room, filled with rows of tables, on which stood old-fashioned sewing machines. There was a cafeteria with rickety wooden chairs and beaten-up tables where the workers ate their meals, and a sad-looking dormitory where they slept. Behind the building was a dirty-looking river. Debris littered its banks.

Mr. Jin’s factory also makes the sort of thing you expect a Chinese factory to make: it churns out inexpensive clothing, aimed at the European market. Mr. Jin is the classic low-cost, tight-margin, squeeze-every-penny manufacturer, the kind of entrepreneur who has been the backbone of China’s astounding economic rise — and who has also been the primary beneficiary of the low yuan, which has spurred the market for China’s cheap goods. On the day I visited, his work force was making tan jackets under the French brand Camaïeu.

Except ... where were all the workers? I had expected the place to be teeming with people. Instead, only about a quarter of the room was in use; Mr. Jin later confirmed that 60 percent of his work force had either quit or been laid off. Business, clearly, was terrible, and Mr. Jin was losing money.

What the low yuan giveth, the rising yuan taketh away. As China’s currency has risen, Mr. Jin’s cheap clothes suddenly aren’t so cheap anymore. And he had other problems as well. “The business environment in Europe is bad,” he said through a translator. Thanks to inflation in China — up 8.7 percent in February alone — his workers wanted more than the several hundred dollars or so a month he says he pays them. The tax rebates he received from the government were shrinking.

Recently, the government passed labor laws that included a series of protections for workers; that was also pushing up his costs. As a result, orders that had once come to him as a matter of course were now gravitating to Vietnam, Mexico and other countries that could undercut him on his only competitive advantage: cost. (I later heard that some Chinese garment manufacturers were putting a “Made in Mexico” tag on their goods and routing them through Mexico to take advantage of Nafta.)

Though he lacked a college education — Mr. Jin had started in business right out of the army, he told me — he had a pretty clear-eyed understanding of what was happening to him. Though factories like his had led the way in China’s economic miracle, the government was not all that terribly interested anymore in having the country be the lowest-cost producer of every good imaginable. Factories that played that game sometimes produced toys that were tainted. And they didn’t necessarily improve the quality of life of their workers. Ultimately, relying on cheap labor to build an economy was a sucker’s game. “If the government lets the RMB keep rising,” Mr. Jin said, “all these factories will go out of business.”

And so it may turn out. But though it may inflict some pain in the short term, over the long haul, it will almost surely be a good thing for the Chinese economy. And it won’t be a lot of fun for the West to watch.

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