China's 'erotic clothing' capital braces for Trump and e-commerce crackdown

By Casey Hall, Florence Lo, Xihao Jiang

GUANYUN, China, Dec 16 (Reuters) - In an industrial park being built with Chinese state support in the middle of a sprawling farming community, factory boss Lei Congrui straightens a tiny golden bell hanging off a choker on a mannequin wearing white-and-pink lingerie.

What Lei calls his "erotic clothing" showroom is one of the few already open in WeMet Industrial Park, whose Chinese name translates as "Victoria's Secret Town" - though it has no official affiliation to the U.S. brand.

The development of the lingerie industry in eastern Guanyun county, 180 miles (290 km) from the metropolis of Nanjing, has exploded partly due to a U.S. tariff exemption likely to soon be curtailed or scrapped.

Under the "de minimis" rule, which seeks to reduce customs paperwork, the United States exempts foreign packages valued at $800 or under from tariffs as long as they're shipped to individuals.

It has fuelled the meteoric rise of Chinese e-commerce firms such as Shein and PDD Holdings' PDD.O Temu, as well as producers like Lei selling through those platforms, while also being exploited for criminal ends, such as fentanyl trafficking.

Efforts by U.S. President Joe Biden to "plug the loophole" in his final days in office, and incoming President Donald Trump's campaign pledge to raise tariffs on China, are threatening investment returns and livelihoods in largely agrarian Guanyun, home to about 1 million.

The European Union and other countries are considering similar restrictions.

De minimis curbs and higher tariffs "will have a relatively large impact on us," said the pony-tailed and bespectacled Lei, whose Midnight Charm Garment Co. serves clients like Shein and relies on the U.S. for 70% of revenues.

Nomura estimates China will export $240 billion in goods benefiting from this exemption this year, accounting for 7% of its overseas sales and contributing 1.3% of gross domestic product.

It forecasts that the U.S. eliminating the rule would reduce export growth by 1.3 percentage points and GDP growth by 0.2 points; the figures worsen significantly if Europe and Southeast Asia also remove the dispensation.

"We expect blue-collar workers from those small factories of unbranded, low value-added and labour-intensive products, to be most affected," says Nomura chief China economist Ting Lu, adding that the apparel sector was among those.

The Guanyun local government and China's commerce ministry, as well as Shein and PDD, did not reply to requests for comment. The ministry said last month "arbitrary" tariffs "won't solve America's own problems" with drugs and the economy.

There are already signs that Victoria's Secret Town, which began opening in stages from 2021, may not match the hopes of local authorities, who have invested 22 billion yuan ($3 billion). Indebted local governments like Guanyun's have often played roles in accelerating successful industries, though at the risk of sharper future downturns by spurring excess manufacturing capacity and deflationary pressures.

On a recent November day, much of the park was vacant. No date has been announced for the launch of other stages of the park, where buildings housing research, design and e-commerce logistics activities are planned.

Other industrial zones across China also face questions of systemic overinvestment.

Local governments "only think as far as they can see," ignoring the national economy, said Majid Ghorbani, associate professor at China Europe International Business School in Shanghai.

INDUSTRIAL MODEL

Lei started his business as a high school student in 2006, with his relatives helping him out in a shabby workshop about a 10-minute drive away. In 2014, he started selling overseas to escape price wars in the Chinese market.

A year later, Washington quadrupled the "de minimis" threshold from $200. His exports have almost doubled every year since. His total revenue last year was over $1.3 million, he said.

Lei said many of his friends, relatives and neighbours opened similar businesses. About 1,400 firms, employing 100,000 people, currently produce "erotic clothing" in Guanyun, he said. The figures he cited are comparable to those reported by Chinese state media.

"If you walk into any neighbourhood around here and shout 'is there anyone making sexy lingerie?', two heads would come out of almost every building," said Lei.

Local authorities were initially circumspect due to Communist Party guidelines against "vulgar" products and content, according to speeches by Guanyun Party officials transcribed by state-run media.

But they eventually embraced the industry and fed it state resources, like the industrial park, which is located next to a giant but sparsely frequented high-speed rail station.

"The county government's support for our erotic lingerie industry is very strong," Lei said. "It invested in industrial land, organises entrepreneurial training and some firms receive funding support."

Factory owners praise the park as a better place to receive customers - many of the showrooms are wholesale and only open by appointment - and store raw materials.

Lei says tariffs and e-commerce curbs would force him to accept lower sales volumes, and U.S. consumers will need to pay more.

He's considering investing in U.S. warehouses and switching to a bulk cargo shipping model instead of direct-to-customer shipments by air, which could lower costs. He is also searching for new clients in South America, Middle East and central Asia, where customers can also be found on platforms like Temu.

Xu Yan, founder of lingerie maker Gummy Park, sells only a third of her production overseas and is confident growth in other markets would compensate for any drop in U.S. volumes.

When Reuters visited her showroom, a model clad in a black camisole and robe was livestreaming for potential Chinese buyers.

"The United States is just one country. The world has more than 8 billion people," Xu said.

How such firms deal with the looming setback is crucial for Guanyun residents. Their average annual disposable income exceeded 21,000 yuan in 2022, up sharply from about 5,000 yuan in 2008, the latest government figures show.

At Midnight Charm's factory near the industrial park, sewing worker Zhang Lan Lan earns up to 7,000 yuan a month, on par with many working in China's booming electric vehicle sector. At its nearby warehouse, 72-year-old Zhou earns up to 3,000 yuan monthly, packaging products in the warehouse with other seniors.

A factory job means Zhang can live with her children instead of moving to a city for work. For Zhou, it means she's not home alone during the day.

Above all, it's better than working the land, said Zhou, who only gave her surname. "People these days have it easier."

($1 = 7.2317 Chinese yuan renminbi)

(Additional reporting by the Shanghai newsroom; Writing by Marius Zaharia; Editing by Katerina Ang)

((marius.zaharia@thomsonreuters.com; +852 2843 6358;))