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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