By  on April 23, 2007

GENEVA — China's robust economic growth and sharp market share gains in exports of key products from apparel and footwear to furniture and electronics pose a serious challenge to Asia-Pacific nations, according to a United Nations report.

The report, "Asia and the Pacific, 2007: Surging Ahead in Uncertain Times," said all of China's top 10 export products have in recent years had "large increases in market shares." The study projects China's economy to grow by 9.9 percent in 2007 compared with 10.7 percent last year, with investment and exports the main stimulants.

U.N. economists emphasize that although labor intensive goods account for a declining share of China's total exports, they are still significant in sectors such as apparel and footwear.

"Competition is intense in low-skilled, labor-intensive products…and China may be displacing competitors," according to the study by the Bangkok-based U.N. Economic and Social Commission for Asia and the Pacific.

A key reason exporters are setting up manufacturing bases in China: it allows them to benefit by selling in the huge domestic market and manufacture exports using cheap but experienced labor.

The report indicated that neighboring Mongolia's apparel industry was already facing "a direct challenge" from China's exports, and apparel manufacturing in the Philippines and Indonesia also are challenged by competitive pressures.

Countries in the region "need to sharpen their competitiveness" if they are to compete with China, and other economies, the report said. This includes providing exporters with access to good transportation infrastructure, including ports, roads, airports, communications and reliable energy, along with sound financial institutions, and simplified rules and regulations.

Identifying and developing international niches can also help countries cope with China. For example, Cambodia has focused on developing socially responsible labor practices and has launched the program "Better Factories Cambodia" to maintain its apparel exports with customers in wealthy nations such as the U.S., where companies have become more concerned about sourcing from facilities with poor conditions that could damage their brand image as well as relations with customers and shareholders.

Similarly, Sri Lanka has managed the global competition by concentrating on quality apparel products and innovation, especially in the design and finishing of garments. The report pointed out that large and middle-sized Sri Lankan firms "have established strong marketing links with buyers" and entered the branded and high-value apparel markets.Rising wage costs in China's southern coastal regions, where a lot of the labor-intensive production has been based, could have some positive effects on poor economies in the region. The average monthly wage in southern China in 2006 was the equivalent of $160 to $190, compared with $90 to $110 for similar work in Vietnam.

"There is some evidence of relocation of coastal production from China to lower-wage-cost countries, such as Vietnam and Cambodia," the report said.

Turning to broader economic issues, the study warned that there is major concern about an "abrupt unwinding of global imbalances leading to deep depreciation of the dollar." A sharp depreciation of major currencies in the region, such as China's yuan against the dollar, "would undermine their ability to remain price competitive."

China's undervalued yuan contributes to the country's low export prices, the study said, and affects exchange rate management in the rest of the economies in the region. A stronger yuan would reduce exports.

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