Economists and industry analysts say a more convenient way for Chinese exporters to climb the value chain is through acquisition of assets from established global brands. Because of the renminbi's appreciation against the dollar and many other major world currencies in the past two years, foreign assets have become a lot cheaper and hence easier for Chinese businesses to pick them up.

The experts also say the government should make it easier and provide more incentives for domestic companies to expand overseas. Hard times are testing the will and capability of Chinese enterprises to wean themselves from the comfort of being "the factory of the world" to become one of the major innovators, economists say.

Since late last year, a combination of factors including falling overseas demand, renminbi appreciation and rising material and labor costs have squeezed profit margins of low-end manufacturers, many of whom have been forced out of business.

Take toy exporters for example. In the first seven months of 2008, toy exports totaled $4.18 billion, with the growth rate dropping 22.4 percentage points to 2.1 percent. In Guangdong province alone, toy exports during the same period totaled $2.91 billion, with the growth rate slowing 39 percentage points to 4.8 percent. An estimated 3,618 toy manufacturers in Guangdong were put out of business in these first seven months.

It's the same story in Zhejiang province, home to many textile and garment exporters. In the first five months of 2008, there were 10,700 enterprises above a prescribed scale of operation running at a loss, accounting for 19.6 percent of the total.

Wang Jianying, general manager of a toy manufacturer in Yiwu city of Zhejiang, tells China Business Weekly: "More and more exporters find that without a better designed and highly innovated product range, it is difficult to survive the current situation, when the yuan's rise against US dollar and other major currencies is eating into our revenue as labor and raw material costs are also increasing. In the past, like most toy exporters, our USP (unique selling proposition) was low price, but now we have to turn to high-value-added orders, which can generate much higher profit and sustain our business."

In addition to the efforts of enterprises to restructure their products and improve profit margins, the central government and some local governments have also taken measures to address the problem of insufficient funding for enterprises hit by the credit curbs to combat inflation.

In early August, the National Development and Reform Commission said it was considering establishing a bank specializing in lending to SMEs to broaden their sources of finance. A week later, the People's Bank of China, the central bank, increased the annual loan quota by 5 percent for national commercial banks and by 10 percent for local commercial banks, taking into consideration that SMEs make up the larger proportion of their clients. The increase in lending as a result of the increase in loan quota is expected to go to SMEs, which have a stronger demand for loans than the large State-owned enterprises, economists say.

Some local governments have also encouraged the establishment of microcredit firms to provide more loans to local enterprises. The first batch of such microcredit lenders, mainly in Zhejiang, will start providing loans from this month after getting the go-ahead. Other provinces such as Guangdong, Jiangsu, Anhui and Inner Mongolia are also preparing for the launch of microcredit lenders.

(China Daily September 1, 2008)