Xiao's dilemma underscores the plight faced by Chinese exporters, especially the small and medium-sized ones in the manufacturing industries, as the yuan continues to rise.

Yuan appreciation has added to the woes of toy exporters, which are already under the pressure of sticking to safety standards, a spokeswoman surnamed Zhou with Shenzhen Toy Industry Association said yesterday.

"They often say they have to pay the employees and buy materials in yuan, though they are paid by their customers in U.S. dollars, and the exchange losses are squeezing their already thin profit margins," she said. "It's very hard for them to raise product prices as the global economy is affected by the slowdown in U.S. economy."

Shenzhen toy manufacturers have been seeing less demand for their products recently, and the demand is expected to continue to be low, said Zhou.

According to data released by the provincial government earlier this month, Guangdong's toy exports, which account for 69 percent of China's total toy exports last year, dipped 2.3 percent in the first two months of this year to US$660 million from the same period last year.

Exporters in other industries are also bracing for tough times. According to Shenzhen Furniture Association, some furniture manufacturers have moved out of Shenzhen to lower costs in order to offset exchange losses. Increasing labor costs, a rising exchange rate, and price hikes for raw materials have all caused the industry's production costs to rise by 20 to 30 percent, the association said.

"Among all the factors lifting the costs, yuan appreciation has a lasting impact on us as the currency keeps rising day after day," said He Jiaxiang, owner of Changsheng Shoe Factory in Dongguan. ?°Prices that seemed fair now during negotiation with our U.S. customers will result in losses when we deliver the goods in the latter half of this year as the yuan appreciates at a rapid pace."

Unpegged from the U.S. dollar in July 2005, the Chinese yuan started gaining momentum in 2006, when it rose 3.3 percent. But it took off in 2007, ending the year up 6.9 percent, and continued growing stronger this year, appreciating 4 percent in the first quarter of 2008.

"As the United States is heading for a recession, demand from the U.S. market is expected to continue shrinking, which will further weaken the bargaining power of Chinese exporters," said analyst Tong Xiaohu."They may experience the toughest time this year in two decades. And whether the small and medium exporters can survive or not largely depends on the pace of currency appreciation in the rest of 2008."