Stronger Yuan Prompts Chinese Companies To Set Up Shop In US

Chinese companies are starting to move manufacturing operations to the U.S., in an early sign that China’s gradual appreciation of the yuan is having an impact.

In the last two years, Chinese companies and government entities have invested $9.4 billion, more than double the prior seven years combined, according to the Rhodium Group, a New York-based advisory firm.

The investment comes as the Chinese government has allowed the yuan to gradually appreciate against the dollar, part of an effort begun in June 2010 to head off international criticism that its currency was undervalued.

The yuan’s value has risen by 8% since then. That’s enough to create an incentive for Chinese companies that export to the U.S. to move their manufacturing closer to the market for their goods, said Dan Rosen, a partner at the Rhodium Group. Rising labor costs in China and a desire to cut shipping costs and times are also driving Chinese companies to invest in the U.S.

The investment in the U.S. is only a trickle so far, representing just 0.3% of foreign direct investment, which Europe dominates at 69%, followed by Japan at 12.7%.

But the trend will continue, as Beijing allows the yuan to trade more freely, analysts say. Market-watchers see China’s loosening of some exchange-rate rules as a sign that the yuan will gradually be allowed to float on its own against other currencies.

If it does, it’ll mark a historic reversal in trade relations between the U.S. and China. Western politicians have accused China of holding down the yuan’s value artificially to help its export sector compete for overseas customers, who find Chinese goods cheaper when the yuan is low. U.S. companies have also moved manufacturing to China, to take advantage of costs held low in part by the cheap yuan.

“The yuan has already appreciated enough to contribute to the interest of Chinese firms in investing in the U.S,” said Rosen. That’s what happened as the yen strengthened in the 1980s and mid-1990s, when Japanese companies took advantage of their surging currency to buy U.S. factories and landmarks, such as Rockefeller Center in New York City.

Several Chinese companies have set up or bought factories in South Carolina, starting with home appliance giant Haier Inc., which opened its first U.S. plant there in 1999. Chinese capital invested in the state since then totals $393 million, according to the South Carolina State Ports Authority.

Yuncheng Plate Making’s American Yuncheng Gravure Cylinder, Inc. subsidiary is among Haier’s imitators, with a printed-cylinder plant in Spartanburg. The company established a U.S. subsidiary in 2007 and opened its factory a few years later. Most recently, Hong Kong-based candy maker Au’Some LLC announced in January 2011 that it would begin manufacturing sweets in Sumter, spending $6 million and hiring 120 people, the state department of commerce announced at the time.

“It’s a natural dollar hedging strategy to manufacture in the U.S.,” said Jim Newsome, chief executive of the ports authority, which runs the Charleston port. “We think the Chinese are poised to invest in manufacturing in the U.S.”

Since salaries and other labor costs are still much higher in the U.S., companies likely to move are those in sectors where labor isn’t the biggest cost, like chemicals and parts suppliers, said David Marchick, a managing director at the Carlyle Group.

Chinese companies are also aiming to sell more goods globally, so they’ll need facilities closer to their customers, he said.

“I think that over the next three to four years we will see a significant growth in Chinese investment in the U.S., particularly in manufacturing,” said Marchick. He attributes the move mainly to the need to be close to U.S. and regional customers, for simpler logistics and cheaper shipping costs.

The same forces are driving U.S. companies to manufacture more goods in the U.S., said Hal Sirkin, senior partner and managing director at the Boston Consulting Group who studies the globalization of business.

Because demand continues to grow within China, many U.S. companies now need their Chinese factories to produce goods for domestic consumption. Rather than build new factories in China for export, they’re now considering overseas production, closer to customers, Sirkin said.

“Ironically, the fact the Chinese economy is growing is causing U.S. companies to think about putting plants in the U.S.,” Sirkin said.