When Bros Holding recently decided to raise export prices, little did the Chinese textile company realize that it was feeding a pressing global debate: is the China price pumping up world inflation?

Bros, which has factories in the eastern manufacturing city of Ningbo and the southern boom town of Shenzhen, is one of an untold number of firms that have quietly put higher price tags on their exports to preserve profit margins.

As payroll costs, electricity bills and raw material prices are all rising, we have to ask for higher prices for our products. Everybody is doing the same, said a manager, who only gave her surname, Wang.

To Wang's list can be added the rise in the yuan, which has gained a further 7 percent since it was revalued by 2.1 percent in July 2005, unshackled from a dollar peg and allowed to float.

Mirroring that trend, the price of Chinese goods imported by the United States edged up 0.6 percent in the year to June after several years of steady falls.

JPMorgan economist Grace Ng estimated that China's export prices, in dollar terms, have risen an average 4.7 percent over the past six months -- a marked shift, given that many firms face over-capacity and have limited pricing power.

China is no longer exporting deflation to the rest of the world, but whether it's a significant exporter of inflation will still take some time to be determined, she said.


Figures on Monday showing consumer price inflation hit a 10-year high of 5.6 percent in July could fan talk that the global economy is losing one of the props that have kept price pressures low despite years of strong growth.

Former Federal Reserve Chairman Alan Greenspan warned in June that rising prices of Chinese imports -- the China price -- may herald the reversal of global disinflationary pressure.

Even so, economists caution against concluding that Monday's report is a reason for investors, already unnerved by credit market strains, to fear that global inflation is taking off.

This is entirely a domestic dynamic that's occurring in China. It's not reflecting any external pressures, said Glenn Maguire with Societe Generale in Hong Kong.

And Jonathan Anderson, chief Asia economist at UBS, said the boost China has given to global commodity prices appears to have tapered off, offsetting the rising price tag for end-products.

On manufacturing goods, every number we have seen in the past few years has gone from deflation into inflation. On the side of commodity and resources, (the China effect), which was a big inflationary factor, now seems to have stabilized, he said.

For example, a flood of cheap Chinese steel products to the global market in recent years has helped depress prices.

July's spike in inflation was entirely due to higher costs for food, which accounts for just 3 percent of China's exports.

Mingchun Sun at Lehman Brothers saw reasons other than this internal inflation behind the rise in export prices. Currency appreciation, trade policies to reduce the surplus and global inflation are probably more important factors, he said in a research report.

To help reduce China's trade surplus and ease friction with its partners, Beijing cut tax rebates on 37 percent of its export categories, including metals and textiles, on July 1.

The textile industry, which employs 19 million workers, typically operates on profit margins of just 3-4 percent.

With such thin margins, there is little room for textile exporters to absorb currency appreciation without raising prices, Sun said. He reckoned export prices for the textile sector rose 3.7 percent in the first half of 2007.


As China becomes more expensive, some foreign firms have relocated to lower-cost countries like Vietnam, India and Indonesia, although analysts and businessmen say China will be hard to dislodge as Asia's pre-eminent manufacturing hub.

Vietnam can complement, supplement or act as a hedge for some corporations, but it cannot replace China, said Wong Horng Yit, a director at BJ Development Pte Ltd in Singapore.

It's not just about the population, it's more about the infrastructure, said the businessman, who imports building materials and machine tools from China.

Anderson at UBS said rising wages and a rising currency would eventually doom low-end manufacturing in China.

But it's not happening very fast. In fact, one of the most surprising trends in Asia is that neighboring countries have taken advantage of the 'breathing space' offered by China to raise their own prices as well, he said in a report.

The growing sophistication of China's export mix is another factor behind the rise in its export prices, economists say.

But as it moves up the technology ladder, China's productivity and huge manufacturing capacity will still allow it to produce more elaborate goods more cheaply than mature economies.

China used to export cheap clothing. Then they were able to produce and export TV sets, mobile phones and PCs. Next will be cars. The cost differential is still significant, said Yiping Huang, chief Asia economist at Citigroup in Hong Kong.

If China succeeds on that path, then China can be a disinflationary force for a very long time.