Wednesday, October 22, 2008

China Factories Slowing Sharply

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A bevy of articles of late on the slowdown hitting China - so much for decoupling. We've noted the rising price of Chinese imports throughout the past year in the import price reports as we watched inflation. Now we can see first hand the behind the scenes story. This is all building to a much higher inflationary environment in the 2010s for Americans and in fact Westerners who have benefited from outsourced manufacturing. Eventually safety standards rise, living standards in those countries rise, wages rise, et al. And that has to be passed along into the cost. This was the first year that trend of lower prices from China reversed.

USA Today: Economy Rocks China Factories

  • In the good old days — oh, three months ago — Tao Shoulong would prowl the streets of this ancient city in his Mercedes-Benz. His wife and partner, Yan Qi, would cruise around in her Toyota Land Cruiser. Together, they would drink into the night with clients, suppliers and creditors, hatching plans to expand their Zhejiang River Dragon Textile Printing & Dyeing Co. Tao built River Dragon from a start-up with four employees into one of China's biggest textile printing firms in just five years. He had even grander dreams: He wanted to see his company's stock trade on Nasdaq alongside the likes of Microsoft and Intel.
  • The dreams are dead. River Dragon shut down on Oct. 7. Tao and Yan have vanished, leaving behind more than $290 million in debt and a lot of anger in this city 140 miles south of Shanghai in the Yangtze River Delta. The company's demise put 4,000 workers on the street and jilted hundreds of suppliers and creditors.
  • The speedy rise — and speedier fall — of River Dragon is a depressingly familiar story in China these days. Thousands of Chinese factories have shuttered in the past year, done in by:
  1. An export-killing global slowdown that began with the collapse of the U.S. housing market and the ensuing financial crisis. Local textile merchant Fang Xingquan, a River Dragon creditor, is among many who believe a sharp drop-off in exports was a key factor in the company's demise.
  2. Rising materials costs that have squeezed profit margins.
  3. A deliberate Chinese government campaign to regulate sweatshop factories out of business.
  • Many economists, including Yu Yongding of the Chinese Academy of Social Sciences, believe that China needs to keep annual economic growth of 8% or 9% to absorb the 24 million people entering the labor force every year or risk social instability.
  • Exports account for nearly 38% of China's economic output. (this is actually down from even 3-5 years ago) JPMorgan Chase calculates that Chinese exports fall 5.7 percentage points every time global economic growth shrinks by a percentage point. Chinese appliance maker Haier has already seen export growth drop to 10% the first three quarters of this year from 30% a year earlier.
  • China contributed 17% of world economic growth last year, the same as the United States, according to the United Nations.
  • The Chinese economy is absorbing another blow beyond crumbling exports: collapsing home prices. "The property bubble is already starting to burst," says Yan Yu, a business management scholar at Peking University, researching the export center of Dongguan in southern Guangdong province. "House prices here in Dongguan have fallen by up to 50% this year," leaving many homeowners owing more on their mortgages than their homes are worth. (sounds vaguely familiar)
  • "People have worked all their lives and believed the hype and bought overvalued properties, then saw their savings vanish," (sounds vaguely familiar - except the Chinese actually had savings to put into their homes rather than 0% down!) says independent economist Andy Xie in Shanghai. "That carries more political risk" than rising joblessness.
  • The good news: Chinese exports have proved surprisingly resilient, growing nearly 22% in September from a year earlier; and the government in Beijing is sitting on enough cash — $1.8 trillion in foreign exchange reserves — to go on a spending spree if needed to rescue the Chinese economy from catastrophe. The bank expects government to turn the spigot on spending, quadrupling the budget deficit to the equivalent of 2% of economic output from 0.5% this year.
  • The Chinese government has put pressure on small firms that foul the environment, pay miserly wages and turn out cheap products. "Beijing no longer wants to be the world's sweatshop for junk," CLSA Asia-Pacific Markets says in a recent report. First, China cut tax breaks for exporters and imposed new export taxes on polluters, even targeting producers of disposable chopsticks. Then it introduced a labor law in January, requiring companies to give workers written contracts and making it harder for them to lay off employees or to hire informal part-time help. (interesting) The combination of tougher regulations, weakening exports, rising costs and a stronger Chinese currency has hammered thousands of small factories.
  • China's 30-year economic boom has produced towns that specialize in one product. There are shoe towns, zipper towns, air conditioner towns and sock towns.
  • Firms that were already struggling with narrow profit margins have been squeezed. More than half of all China's toy exporters — 3,631 firms — shut their doors the first half of the year, the official Xinhua news agency reported.
  • China's textile industry is also enduring a deep slump. Textile exports have been tumbling since March. More than 10,000 small textile manufacturers went out of business the first half of this year alone, the government says.
  • Independent economist Xie says China became overly dependent on demand from the U.S. and Europe that was stoked by too much borrowed money and inflated asset values. "It's all coming to an end," he says. "You need to look elsewhere for livelihood. Americans cannot spend money anymore."

AP: Factory Closure in China a Sign of Deeper Pain

  • Unemployed worker Wang Wenming was angry at his boss for shutting down a massive Chinese factory this week that made toys for Mattel Inc., Hasbro Inc. and other American companies. But the assembly line worker was also furious at the United States. "This financial crisis in America is going to kill us. It's already taking food out of our mouths," the 42-year-old laborer said Friday as he stood outside the shuttered Smart Union Group (Holdings) Ltd. factory in the southern city of Dongguan.
  • However, factory closures won't just be a China problem — shoppers will feel the effect in malls and stores in the U.S. and Europe. "When these companies go bust, the outcome is higher prices," said Andy Xie, an independent economist in Shanghai. "Labor costs have gone up 70 to 100 percent in the last three or four years. But these guys have not been able to raise their prices because Toys "R" Us, Home Depot and Wal-Mart are saying no price increase. How is that possible?"

  • For years, there were too many factories competing to win bids from foreign buyers demanding prices that were often unrealistically low. The winners were American and European consumers, who enjoyed rock-bottom prices. But many factories were scrimping on materials and stiffing their suppliers just to survive, Xie said. The financial crisis will be the final culling factor that forces many wobbly factories to go belly up and end an unsustainable situation, he added.

  • Wan said the global economic crisis wouldn't deter the provincial government from pressing on with a sweeping plan to restructure the Pearl River Delta's manufacturing base. He said the government wanted low-end factories to move farther into China's interior so that they could be replaced with more high-tech, advanced industries. (Chinese labor on the coasts is now "too expensive" so they will move to inland China. Then when wages rise there we'll move the manufacturing base to Vietnam or other such countries - wherever labor is cheapest, the money flow will eventually go)


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