For China's Toymakers, an Unwanted Gift

Lucy Liang, a sales manager for Jiangsu Zhongxin Toys, disappointed potential U.S. and European clients who were inspecting pink and yellow teddy bears in the toymaker’s stall at a trade fair in Canton last month. “My boss orders us to turn down all the orders for the good of the company” because China’s yuan may rise, crimping profit margins, said Liang as she sipped pu-er tea in her stand. “Even first-class economists can’t predict whether the yuan will appreciate or by how much. How could we?”

China’s toymakers accept profits of as little as 3 percent to stay competitive. Such low margins, coupled with payment periods of three months or more, mean companies are particularly vulnerable to currency fluctuations, says Lin Songli, an analyst with Guosen Securities in Beijing. The yuan has gained 6.4 percent against the euro and 2.5 percent against the dollar so far this year. “If the yuan rises to 6 to the dollar, we’re doomed,” says Simon Pan, general manager of Zhejiang Huangyan Hongfan Toys Factory. The company is raising prices by 3 percent to 5 percent to offset the Chinese currency’s gains, but further increases would mean losing customers, he said in an interview at his booth, which was filled with educational toys and brain-teasers destined for the U.S.