State’s Trade Ties Mean the Money Move Matters

China’s decision to strengthen its currency could have a wide-ranging effect on California business, giving a boost to garlic growers in Gilroy but dealing a potential setback for Barbie.

Companies that have struggled to compete on price with less-expensive goods made in China stand to gain from the revaluation of the yuan that goes into effect today, which will make U.S. exports to China cheaper and Chinese imports more expensive. In addition, companies that have made major inroads in China, such as Coca-Cola Co. and McDonald’s Corp., also could benefit as the yuan’s appreciation gives Chinese consumers more purchasing power.

But businesses that depend on Chinese-made goods -- retailers that stock their shelves with products made in China and toy makers such as Mattel Inc. that manufacture their wares in China -- could soon be faced with higher prices. They would then have to decide whether to pass those higher costs along to U.S. shoppers or accept lower profit margins.

The revaluation is particularly important to California, by far China’s biggest trading partner in the U.S. The Golden State imported nearly $85 billion of Chinese goods in 2004, the bulk of it electronics, toys, furniture and apparel. Meanwhile, the state exported $13.3 billion of goods to China -- electronics, surgical instruments, cotton and steel among the leaders.

But the effects go beyond international trade.

Beijing’s decision sent a shudder through the state’s housing market. Surging prices and record new construction have largely been fueled by low mortgage rates, which have lingered in good part because the Chinese have been heavy buyers of U.S. Treasury securities.

Now there are fears that as part of the move to raise the yuan’s value against the dollar, the Chinese won’t be as eager to buy dollar-denominated securities. If the Chinese buy fewer bonds, bond prices may fall and yields -- a key indicator of the direction of interest rates -- would rise.

Indeed, the yield on the 10-year Treasury note, a guidepost to 30-year mortgage rates, jumped Thursday after China’s announcement, and stocks of major California home builders such as KB Home, Ryland Group Inc. and Standard Pacific Corp. fell sharply.

Some California businesses, which for years griped about how an artificially low Chinese currency put them at a competitive disadvantage, were heartened.

“They didn’t change the currency as much as we had hoped, but it’s better than nothing,” said farmer Joe Lane, whose Garlic Co. in Bakersfield is one of California’s largest garlic producers.

A surge of Chinese garlic imports has driven prices so low that the state’s growers have significantly cut production in recent years, he said. California garlic production, centered around the town of Gilroy, fell to $129.5 million in 2004, down from $269 million eight years ago, according to the Fresh Garlic Producers Assn.

The U.S. agriculture industry exported $3.9 billion more to China than it imported last year, according to the American Farm Bureau Federation. But some products such as fruit juices are substantially imported, and eventually American consumers “will see a higher price for these goods” as the yuan appreciates, said Bob Young, the farm bureau’s chief economist.

“How much of an increase depends on how much of an adjustment in profits the Chinese producers are willing to take,” he said.

For El Segundo-based Mattel, the revaluation could mean that parents may wind up paying more for Barbie dolls, Hot Wheels cars and dozens of other popular toys next year.

With the value of the yuan increasing -- and material, labor and transportation costs rising -- “we are going to look at pricing ... in 2006,” said company spokeswoman Lisa Marie Bongiovanni.

Mattel, the world’s largest toy maker, produces 70% of its goods in China, and like other manufacturers it will have to either absorb the cost increases or pass them on to its customers.

Toy Quest, a Los Angeles company that expects to sell $200 million of motorized toys this year, is struggling with the same issues.

“Every single one of our products comes from China,” said Brian Dubinsky, president and co-owner. His Chinese partner, Samson Chan, negotiates production contracts in U.S. dollars with a dozen Chinese factories each year. Prices for this year’s toys already are set, but Dubinsky fears that the revaluation could force Toy Quest to raise the prices it charges retailers next year.

Despite that prospect, Dubinsky doesn’t expect to shift any production out of China because “it is still one of the best places to manufacture,” he said.

At least one sector of American business, the consumer electronics industry, saw the currency adjustment as a possible double-win.

If Chinese electronics become more expensive in U.S. stores, American-made products should benefit as the price differences narrow, said Jeffrey Joseph, a spokesman for the Consumer Electronics Assn. in Arlington, Va. Plus, American manufacturers would have a better shot at competing in China, he said.

“If you walk into any of the ‘big box’ retailers, they’ve been filled with items from no-name brands” that are often Chinese, Joseph said. “If you have a level playing field, it could also mean a return to the value of brands.”

U.S. technology companies that depend on Chinese suppliers would have to pay more for those components. But some products, such as flash memory and LCD screens, continue to get cheaper because of improved technology and other factors, so the American companies’ spending burden might not change much.

Semiconductor makers and others in the tech field negotiate many of their supply deals in dollars, so they won’t be greatly affected, said Martin Reynolds, an emerging-technologies analyst at research firm Gartner Inc.

A larger increase in the value of the yuan could prompt companies to move jobs from China to other Asian countries, he said. But he doubted that the Chinese government would let the currency move that much.

In fact, executives and analysts agreed that all of these scenarios depend on one thing: The Chinese yuan will have to keep rising in value against the dollar. China’s initial move, in which the yuan gained 2.1% in value against the dollar, is likely to have little or no immediate effect either on U.S. businesses or consumers, they said.

“Prices in our stores are not going to change anytime soon,” said a spokeswoman at Wal-Mart Stores Inc., the world’s largest retailer, which last year spent $18 billion on Chinese goods, or 8% of its total purchases.

Many retailers enjoy sizable price markups on Chinese-made products, and it’s possible the stores would shave those markups to keep retail prices at current levels, making the yuan’s revaluation invisible to shoppers, said Gary Hufbauer, senior fellow at the Institute for International Economics.

The revaluation “is small enough that it can be comfortably absorbed in the profit margins” of major U.S. retailers, Hufbauer said.

Clothing companies also aren’t likely to feel the pinch of potential price increases until 2006 because most have already completed their purchases for the rest of this year, analysts said. That probably would mean that the key back-to-school and holiday selling periods would be unaffected, he said.

Times staff writers Melinda Fulmer, David Colker, Annette Haddad, Elizabeth Douglass and Joseph Menn contributed to this report, and Times wire services were used in compiling it.