by Xinhua writer Zhu Yifan

    BEIJING, March 19 (Xinhua) -- For three decades, China has reaped the benefits of the decision to open up its economy. In many years, exports grew more than 20 percent -- and large swathes of south China became developed and affluent in the process.

    But this very successful model faces an array of challenges, foreign and domestic, in a changing world. What worked in 1978, and for so many years thereafter, isn't working the same way anymore and China has the task of reshaping its economy to generate the next round of growth.

    Processing trade, which provided jobs for as many as 35 million to 40 million workers, many of them migrants, has accounted for 51percent of Chinese exports. Its role and structure are about to change.

    Exports have been hailed as one of the three economic growth engines, together with consumption and investment, of China's development. Exports contributed 2.5 percentage points, or 22 percent, to gross domestic product growth last year.

    The trade engine is running more slowly. The monthly trade surplus came to 8.56 billion U.S. dollars in February, less than half the January figure of 19.49 billion U.S. dollars. Certainly, some of the decline was caused by an unusual convergence of events.

    The Lunar New New holidays and the severe winter weather that disrupted transportation contributed to the sharp decline in February, but the trade gap had been narrowing since October, according to official figures.

    THE NEXT GENERATION OF LIGHT INDUSTRY

    Chinese exporters face a new round of challenges. Just as China once took over from former cheap manufacturers in Japan or the Republic of Korea (some of whose manufacturers themselves came to China for lower costs), a new group of competitors is making itself felt: Vietnam, Bangladesh, even some nations in Africa. Some manufacturers in China, foreign and domestic, will end up going overseas to cut costs.

    Other challenges include labor, which is becoming costlier and could become scarcer within a few years; higher costs for all manner of inputs as world commodity prices surge; a stronger currency and higher interest rates, and weakening economies in major overseas markets.

    Many of these factors were at work when deals were signed at the 18th East China Fair held in Shanghai earlier this month. Orders at this annual event, seen as a barometer of foreign trade trends for the coming year, only grew 3.52 percent year-on-year to3.67 billion U.S. dollars. Orders from the United States even contracted, by 1.5 percent.

    "Our company got only slightly more than 800,000 U.S. dollars worth of contracts, barely half that of last year. It was my worst experience since I began attending the fair three years ago," said Ma Tao, a salesperson for a glassware maker from east China's Shandong Province.

    There's little that export-oriented garment manufacturers and ceramic makers can do. They have become used to doing processing trade, which means taking orders from overseas companies looking for a cheaper place to produce. Costs in China have been kept low primarily through cheap labor.

    But labor is no longer so cheap. A new labor law, which took effect on Jan. 1, has already significantly raised wages. Companies in Guangzhou are paying 1,160 yuan (about 165 U.S. dollars) per month, 13 percent more, for new staff this spring.

    The traditional cost advantage has been further eroded by the faster appreciation of China's currency. Exporting companies have had to raise their prices.

    Another issue is higher input costs: inflation and surging world prices for commodities are hitting light industry hard. The producer price index for China's industrial products rose by 6.6 percent in February over the same month last year. The overall cost of raw materials, fuel and power surged 9.7 percent from a year earlier. Analysts forecast that textile prices would rise another 5 percent to 10 percent after March as a result of more expensive cotton and nylon yarns.

    Now that "Made in China" is no longer so cheap, old clients are looking for new suppliers in surrounding countries. The pressure is particularly severe on the textile industry, a typical labor-intensive business that depends largely on exports. Equipped with few advantages but low prices, garment makers have been trapped between two unpalatable choices: losing orders or taking lower profits.

    China's textile and garment exports in February dropped 32.9 percent from 10.3 billion U.S. dollars in the previous month, largely due to weakening U.S. and European demand and the severe winter storms, customs authorities said. The total for the first two months was 25.6 billion U.S. dollars, up only 9.6 percent from a year earlier, compared with an increase of about 20 percent in the past years.

    There are so many choices. Companies can move overseas or go to cheaper locations in China's inland areas. They can try to re-orient their sales toward domestic consumers, whose incomes are rising. They can go into other lines of business. Or they can go out of business, as many already have.

    "In only half a year, our export cost was pushed up by 10 percent and profit reduced by 40 percent," said Shen Yaoqing, vice-president of Shangtex Holding Co., a major Shanghai-based textile manufacturer that exports about 2 billion U.S. dollars worth of products annually.

    "Our company is on the brink of failure," Shen said.

    In the Pearl River delta, companies with overseas investment, mainly those from Taiwan, Hong Kong and Macao, have been leaving. According to preliminary figures from the Shenzhen Bureau of Trade and Industry, more than 500 companies, whose annual production was valued at 15 billion yuan, have left the city since 2005.

    More than 1,000 smaller shoe makers out of some 6,000 went bankrupt last year, said Asian Footware Association secretary general Li Peng.

    TIME FOR A NEW PARADIGM

    Smarter and nimbler companies are revising their strategies. They have shifted away from quantity and to quality. Hodo Group, a garment maker in eastern Jiangsu Province that also has a domestic brand, said it had shifted last year to higher value-added garments.

    Lu Li, assistant manager, said "We developed new textiles and designs, which would help us lift export prices."

    But even strong companies are seeing their profit margins squeezed as the government scales back preferential policies for labor-intensive and export-oriented processing industries. For example, China cut export tax rebates on garments by 2 percentage points to 11 percent, last June.

    A joint study by Booz Allen Hamilton and the American Chamber of Commerce in Shanghai found that 54 percent of the overseas manufacturers that had solely-owned or joint-venture bases in China said that China is becoming less competitive, and 20 percent had already decided to move at least part of their operations in China to such places as Vietnam or India.

    A few Chinese companies are also moving manufacturing to Vietnam or Indonesia, which have cheaper resources and labor costs. China Customs said that in February, outsourcing trade was 31 million U.S. dollars, or 8.5 percent of total foreign trade.

    It's certainly a marked turnaround from the wave of capital that flowed into coastal China 30 years ago.

    Behind all these changes lies a shift in government policy, driven by a recognition that China's current export structure won't support economic development the way it used to.

    China encourages technical innovation, which would help reduce the high energy consumption involved in manufacturing that had drawn international criticism.

    China also has a persistent gap between its well-developed east and the poor central and western regions, which could be at least partially reduced if industry moved inland.

    Another issue is the changing structure and, potentially, the size of China's labor force. The processing trade can't provide suitable jobs for millions of university graduates, whose number is expanding every year.

    "We are not moving labor-intensive industry out. It is our advantage," said a senior official with the Minister of Commerce. "It is true that processing trade is restricted by the rising land, power and labor costs in eastern China. But the middle and western parts of the country have cheap resources. With government support policies, it is possible to move the processing trade industry inwards."

    There won't be many companies moving out of China, especially with the right policies, Wei said.

    Companies do face some higher costs if they move inland, such as those for transportation. But inland regions such as Qinghai, Gansu, Yunnan and Guizhou Provinces saw more than 100 percent increases in investment in garment and textile processing trade in the first half of 2007, according to the China Chamber of Commerce for Import and Export of Textiles.

    As for eastern China, the government aims at promoting services, which would provide jobs for educated workers.

    One example of such trade is a software development zone established in 1998 by the government of northeast China's Dalian City, which is getting orders from Japan and other countries.

    China's 10th Five-Year Plan set a target for the foreign service trade at 400 billion U.S. dollars by 2010. The figure for 2006 was already half the way there, at 191.8 billion U.S. dollars.

    China's exporters face an increasingly complex domestic and global situation. But, as Premier Wen Jiabao stressed in his government work report this month, China should speed up the transformation of foreign trade patterns and encourage the export of higher value-added name brand products.

    A challenging year lies ahead. As earlier export orders are filled, it's likely that Chinese exporters will feel the pinch of a slowing world economy. But Minister of Commerce Chen Deming remains optimistic, saying that China is expected to achieve steady growth in exports in 2008 despite the trade surplus shrinking last month.