Will China's banks collapse?

[skyjet]

Richard Wachman
0ct. 16


Is Chinese premier Wen Jiabao right to say that the credit crisis will have a negligible impact on China because its banks have limited involvement with global capital markets?

'We are confident that we can maintain the stability of Chinese financial markets,' says Jiabao in a statement on the Chinese foreign ministry website. He adds that the biggest contribution China can make is to keep its economy growing in a stable and fast manner. Quite So.

Assuming that the Chinese haven't been playing in the derivatives market or investing in 'toxic' US mortgage-backed securities, a systemic collapse of China's banks seems unlikely, especially as the country is sitting on hundreds of billions of dollars in foreign exchange reserves.

But comments from the ministry of commerce, quoted in the official Xinhau news agency, should be treated with more scepticism. A spokesman says: 'many Chinese export products are daily necessities, so we don't think that a slowdown in major economies will cause a sharp fall in demand for these products.'

Western consumers have been huge buyers of Chinese finished products that include furnishings, furniture, toys, clothing and sports equipment. The truth is that Chinese industry, and employment, are going to suffer in the looming global recession as China's customers in the west rein back on spending in a way that will soon become painfully obvious.

[skyjet]

 17 October 2008

BEIJING: A Chinese toy maker that exported to big US brands such as Mattel and Disney has shut down due to the financial crisis, leaving more than 6,000 people without work, state press reported on Friday.

Smart Union closed its factory doors in the southern Chinese export hub of Dongguan this week, leaving its workers stranded outside the plants, the China Daily reported.

"The main reason for the closure is we are too dependent on the US market, which has become sluggish," said Xu Xiaofang, a Smart Union human resource worker, according to the China Daily.

Rising labor costs, expensive raw material prices and the appreciation of the Chinese currency, the yuan, had also contributed to the problems, Xu said.

Smart Union announced to the Hong Kong stock exchange, where it is listed, a loss of 201 million Hong Kong dollars (25.9 million US dollars) in the first half of the year.

It was unclear if the factory had halted production temporarily, or if it would be closed for good.

Smart Union had sold many of its products to US toy giants Mattel and Disney, according to the China Daily.

"After losing money for the first half of the year, its cash flow finally dried up," the paper said.

"The workers... have become the latest victims of the worldwide financial tsunami."

Chinese state press had already reported this week that more than half of the nation's toy exporters had gone bust in 2008, hit by rising production costs, the stronger yuan and tightened safety standards for their products.

A total of 3,631 enterprises that made toys for export, or 52.7 per cent of all such companies, had gone out of business in the first seven months of the year, Xinhua news agency reported.

The businesses were mainly smaller producers with an export value of less than 100,000 dollars, it said, citing a report by the General Administration of Customs.

China is the world's largest toy producer and exporter, sending about 17 billion of them to overseas markets in 2007, according to Chinese customs data.

[skyjet]

Fri Oct 17,

Smart Union, a supplier to Mattel, had not paid its 6,500 employees in the export-oriented southern city of Dongguan for two months, the China Daily reported.

About 1,000 workers gathered at the factory in Zhangmutou, before moving on to local government offices guarded by about 100 policemen. Many said they had worked for the company for years.

"I feel very agitated. I have waited for a few days now, we need money to pay for our housing and food," said worker Huang Luohui, 33, who is owed two months' wages.

[Zedi]

10/25/2008

DONGGUAN, China •

 At least 2.7 million factory workers in southern China could lose their jobs as the global economic crisis hits demand for electronics, toys and clothes, according to industry estimates.

The region has seen massive export-driven expansion in recent years by supplying the world with cheap consumer goods, but rising production costs and falling US and European demand have marked a swift end to the boom.

Now 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan, and Shenzhen are expected to close before the Chinese New Year in late January, the Dongguan City Association of Enterprises with Foreign Investment estimates.

By then, the association expects overseas demand for products from the three manufacturing hubs to have shrunk by 30 percent, as the knock-on effects of the US housing market collapse and credit crunch filter down to Chinese workers.

“I am afraid it is not going to look good on the Chinese government if the decline of the export-led industries and the unemployment problem continue to worsen,” Eddie Leung, the association’s president said.

Leung, also a member of the Chinese Manufacturers’ Association, said the estimate of 2.7 million job losses was conservative, given that many of the larger factories in Guangdong province employ thousands of workers.

One of them, Hong Kong-listed Smart Union, a major toy manufacturer in Dongguan supplying US giants Mattel and Disney, closed its doors last week, leaving 7,000 workers out of work and with several weeks of back pay owed.

Clement Chan, chairman of the Federation of Hong Kong Industries, said a quarter of the 70,000 Hong Kong-owned companies in southern China, 17,500 businesses, could go to the wall by the end of January. Describing the likelihood as a “worst case scenario,” he said Hong Kong firms in the region employed a total of 10 million workers, but did not want to speculate on the extent of possible job losses.

While small and medium-sized factories are especially prone, the threat of lay offs looms over the region’s manufacturing giants, further squeezed by the appreciation of the yuan.

[skyjet]

2008-11-05

Domestic enterprises should enhance their protection against risks and adapt to the changing world economic environment, Chinese Vice Premier Li Keqiang said.

Li made the remarks during a visit to eastern Shandong province from Sunday to Tuesday. He visited enterprises, construction sites and rural areas.

"We must closely watch the changing world financial and economic climate, which is having a negative impact on China's development," Li said.

To meet the challenges, enterprises should expand domestically and overseas, improve their international competitive power, adapt to the market and improve their risk resistance, Li said during a visit to the Haier Group, one of the country's leading home appliance manufacturers.

Li also called on governments at all levels to maintain stable and relatively fast economic growth by boosting domestic consumption and keeping investment at "rational level".

More should be done to increase farmers' income, improve agricultural production and improve rural infrastructure, he said.

[skyjet]

2008-11-05


Gao Yuping, along with many laid-off workers, perused job postings on the walls of a closed toy factory in Dongguan, China's major toy export base.

Not satisfied with the wages offered, Gao and his wife decided to end their stint as migrant workers in this city in China's southern province of Guangdong and go home to Guizhou province.

"We may come back next year if the situation improves," said Gao, 38.

The couple worked for 14 months in a factory of the Smart Union Group in Dongguan, with a monthly income of about 4,000 yuan ($585). However, the Hong Kong-listed toy company abruptly shut down last month, leaving the couple and 6,700 other workers jobless.

China is the world's largest producer and exporter of toys, with Guangdong alone contributing about 70 percent of the overall output.

Dongguan, the province's leading toy base, had more than 4,000 factories and some 2,000 suppliers at the peak in 2001.

But the boom began to cool down about two years ago.

Rising raw material prices and wages and a stronger Chinese currency  raised production costs by 25 percent for most companies, said Li Zhuoming, head of the Guangdong Toy Association.

Large quality recalls by international toy giants, including Mattel Inc, also hurt the industry as Western countries raised standards to ensure safe toy imports.

Huayuan Toy Co Ltd opened in 1987 with nearly 100 workers in one factory. By 2005, the Hong Kong-invested company had four buildings and more than 1,000 employees.

"But since 2006, growth slowed. We received fewer orders and sometimes our clients were not able to pay," said Zhong Guanhua, a factory chief.

The financial meltdown gripping the West made the situation even worse this year. Falling consumption was the fatal blow to Chinese toy makers. Their busy season usually runs from June to October, as big toy companies generally place their Christmas orders months in advance.

"But we haven't received any new orders since August. Obviously, the demand for toys has been shrinking drastically," said Zhou Zhiming, board chairman of Shengda Clothes and Toy Corp.

About 20 percent of the small factories in Dongguan closed this year, he said.

Jiang Haitao, manager of another small toy plant, said orders for Christmas trees had dropped by 30 percent.

"The toy industry is experiencing the most difficult time since the country adopted the reform and opening-up policy in 1978," said Li.

Customs statistics showed that 1,554 toy companies in Guangdong were still exporting as of the end of September, 3,266 fewer than in 2007.

Many small firms had suspended or quit the business due to higher costs and gloomy market prospects, but their exit allowed large competitors to take a bigger market share, said Li.

For years, more than 90 percent of Guangdong's factories were making toys and accessories for foreign buyers, said Shi Xiaoguang, chairman of the China Toy Association.

As they saw many companies losing foreign buyers amid the financial crisis, big toy makers turned to technical innovation for sustainable growth and profits.

Longchang Toy Co Ltd has never worried about sales of their toy robots, which can perform more than 200 actions. Orders kept coming for the high-end product, which is sold for 2,000 yuan each.

Longchang, with more than 8,000 employees, including 300 research staff, invests more than 30 million yuan in technological innovation every year. The company now has more than 300 toy patents, according to manager Liang Lin.

Another choice is to explore new markets.

Each Chinese child spends about 40 yuan a year on toys, but the figures in Asia generally and the world are $13 and $34 respectively, according to Xiao Senlin, general manager of Hayidai Toys Factory.

"The domestic market might be a reliable support to help us survive," he said.

Many others are turning to Russia, the Middle East, eastern Europe and some other new markets, where demand appears strong.

Toy exports to Brazil, India and Russia rose 90 percent, 43 percent and 14 percent, respectively, during the first three quarters of the year from the same period last year.

Dongguan is a mature toy production base that can cope with changing fortunes, said Li. "The industry, which withstood the Asian financial crisis and massive recalls, can survive the hard situation this year."

Effective on November 1, China raised the export tax rebate on toys from 11 percent to 14 percent, which could help exporters.

"So long as there are children, there will be demand for toys, and we will manage to find opportunities for survival," said Xiao.

china daily

[skyjet]

Chinese manufacturing in free fall as export markets collapse

7 November 2008


Output by China’s vast manufacturing sector, which employs tens of millions of workers and has functioned as the cheap labour workshop of the globe, is slowing dramatically as demand collapses in its major North American and European markets.

A range of indices testify to the beginnings of a deep slump. At the recently concluded Canton Trade Fair, orders for Chinese export goods fell one-third to $24.8 billion, compared with $38.2 billion in 2007. Orders from US sources fell by two-thirds.

Analysts such as Stephen Green of Standard Chartered Bank in Shanghai have estimated that export growth in 2009 will plunge from over 22 percent in the first nine months of 2008 to “zero or even negative growth”. Green told the British Independent last month: “Many factories are looking at completely empty order books.”

The Purchasing Managers’ Index (PMI), which measures the activity of major Chinese companies, dropped in October to 43.5, indicating economic contraction. Eric Fishwick of investment bank CLSA wrote in a report: “The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession.”

Some 90 million tonnes of iron ore are now stockpiled in Chinese ports—two months worth of imports—due to a sudden collapse in demand by steel mills. Chinese orders for copper, nickel and a range of other metals have also plummeted. Credit Suisse has downgraded its forecast of increased oil demand by China from 4 percent to near zero in 2009, as industrial activity falls.

In an article published on the weekend in the Communist Party’s journal Qiushi, Premier Wen Jiabao warned the Chinese regime that “this year would be the worst in recent times for our economic development”.

China’s economic growth had already slowed to 9 percent in the third quarter of this year—the lowest in five years. Both exports and foreign direct investment (FDI), which totalled $US74.8 billion in 2007 and was on schedule to exceed that figure this year, are expected to fall dramatically in the last quarter.

The investment bank UBS has responded by downgrading its growth expectations in 2009 to just 7.5 percent, below the 8 percent level most analysts believe is necessary just to generate enough jobs for the millions of new entrants into the labour force.

Unemployment is set to soar as millions of workers lose their jobs. The China Labour Bulletin reported last month that some 8 percent of all businesses in the export city of Wenzhou, in Zhejiang province, have already closed down or stopped production. Companies still operating are cutting workers’ wages in a desperate attempt to cut costs and maintain profitability.

According to an October 28 report by Forbes, the Dongguan City Association of Enterprises with Foreign Investment expects up to one-third of the 45,000 factories in the major export cities of Dongguan, Shenzhen and Guangzhou will have closed by the Chinese New Year in January. Several million manufacturing workers will be laid off, triggering massive job shedding in the retail and service sectors as well.

In numbers of cases, companies have closed down owing months of back pay to their staff, provoking volatile demonstrations and cases in which workers have occupied their factories. Nervous local and provincial governments have stepped in to give payouts to laid-off workers.

Hu Weicai, a worker who took part in an occupation of the Smart Union toy factory last month, told the Washington Post: “The government was very afraid when they saw what was happening. What the government fears most is workers making trouble. They paid us to stabilise our moods.”

The regime, however, cannot provide alternate employment. The British Sunday Times reported on November 2: “Businessmen travelling in the southern Chinese provinces say that entire industrial estates have turned into ghost towns as thousands of migrant workers who have lost jobs head back to the countryside.”

Stanley Lau of the Federation of Hong Kong Industries told the Los Angeles Times that more than 15 percent of the 70,000 Hong Kong-owned enterprises across China will have shut down by the Chinese New Year, but predicted another wave of closures during the annual holidays.

Many factory operators are holding out for the holidays before shutting down, in the hope of avoiding confrontations with laid-off employees. Each New Year, millions of workers in the export zones return to their home towns and villages, in an exodus that empties the working class suburbs. “Once workers go home, they [the owners] can close down the factory quietly”, Lau said.

The Beijing regime is growing increasingly alarmed at the crisis and taking measures aimed at shoring up the export sector, boosting the role of domestic consumption in the economy and creating jobs.

Last month, the government unveiled increased export rebates for 3,000 products, to give them a greater competitive advantage in world markets. It announced a 2 trillion yuan ($US292 billion) project to expand the country’s rail system by 2020, in the hope of creating 1.5 million jobs and providing additional demand for a range of industries, particularly steel. Provincial and local authorities are also bringing forward infrastructure projects.

Cash and regulatory incentives are being offered for people to buy real estate. Home sales are now down by 55 percent in Beijing, 38.5 percent in Shanghai and 15 percent nationally, driving down asset values. To stimulate spending in rural areas, where the majority of the population still lives, the minimum prices paid to farmers for produce have been increased by 15 percent.

The fiscal spending is being accompanied by monetary stimulation. On October 29, the Peoples Bank of China reduced interest rates for the third time in two months.

The measures have an entirely stop-gap character, however. With export markets collapsing and investment falling away, nothing Beijing does will be able to avert a severe economic contraction and explosive social tensions in the country’s major industrial centres.

By James Cogan

[skyjet]

BEIJING, Nov 11 (Reuters)

 - China's railway and road ministries have promised to invest quickly and aggressively to help execute the government's 4 trillion yuan ($586 billion) economic stimulus package.

The Ministry of Railways plans to invest 600 billion yuan in 2009, up from 350 billion yuan this year, a figure that has been increased from the original target of 300 billion, according to Yang Zhongming, the head of the ministry's planning department.

'The scale of construction and size of investment will be unprecedented in China's railway history,' Yang told the official People's Daily newspaper.

He said next year's capital spending would eventually boost gross domestic product growth by 1.5 percentage points and create 6 million jobs. It would consume 20 million tonnes of steel and 120 million tons of cement, Yang said.

The ministry would ramp up investment over the rest of 2008, spending 150 billion yuan this quarter, he added.

He Jianzhong, a spokesman at the Ministry of Communications, said the pace of road building was also moving up a gear.

The ministry would complete investments totalling 300 billion yuan this quarter, bringing 2008 spending on highways to 800 billion yuan, He told state television on Tuesday.

In announcing its stimulus package on Sunday, the State Council, China's cabinet, identified a need to invest urgently to help cushion the world's fourth-largest economy from a downturn in global growth.

According to the plan, which runs through 2010, the central government will itself spend an extra 100 billion yuan by the end of 2008 and catalyse an additional 300 billion yuan from local governments, state banks and other sources.

Details of the pump-priming remain vague. It is unclear, for example, how much of the projected road and rail investments are included in the package. But the decision to turn on the spending taps is prompting ministries and local governments to aim high.

State television said 3.0 billion yuan would be spent on small airports.

The Economic Observer newspaper reported on Monday that the Ministry of Communication has plans to invest 5 trillion yuan in roads and ports by 2013.

Beijing will spend 240 billion yuan on subways and other transport infrastructure in the capital by 2012, more than the 170 billion spent in the five years before the Olympics, the China Daily reported on Tuesday.

By 2012, the city expects to have 420 km (260 miles) of subway lines, up from 110 km now, to help ease road congestion, the paper quoted a municipal transport official as saying.

And Guangdong has plans for 222 new investment projects worth a total of 2.37 trillion yuan, the Southern Daily newspaper on Monday quoted Li Miaojuan, head of the province's Development and Reform Commission, as saying.

[skyjet]

November 23, 2008

Projects planned by provincial governments in China will add an additional $1.46 trillion to the value of the Chinese economic stimulus package, state television said Sunday.

The spending, worth 10 trillion yuan comes on top of the 4 trillion yuan stimulus package that the national government announced earlier this month. That package included more money for rail and infrastructure projects and social spending. Details of specific new projects and areas of spending are only slowly emerging.

"Within the last week, provincial governments have announced accompanying stimulus programs amounting to 10 trillion yuan," Central China Television said in its noon broadcast. "Among the largest investment plans are that of Yunnan Province at 3 trillion yuan, and Guangdong at 2.3 trillion yuan."

The planned investments span many sectors, including roads, ports and housing, CCTV said. The spending plans will emphasize rural infrastructure, it added.

While the Chinese government's stimulus package was initially welcomed by a world worried about increasing economic gloom, economists later concluded that its effect could be limited, as much of the spending appeared to be previously budgeted items.

The Chinese state media has emphasized the package as part of a broader effort to encourage domestic consumption, and offset a sharp drop in demand for the exports that have fuel Chinese economy.

The central government has allocated 4.8 billion yuan to building rural health care, particularly hospitals and clinics, the Xinhua, the official news agency, said Sunday, as part of its commitment to increase spending on rural medical care in 2008.

Still, the funding mechanism for many of the announced projects is unclear, while reported numbers are often in flux.

Officials in Sichuan Province said Friday that most of the estimated 3 trillion yuan needed for the three-year reconstruction of towns devastated by a May 12 earthquake would come from nongovernment sources like banks and businesses. The central government would provide 200 billion yuan and the provincial government 300 billion yuan, said Vice Governor Wei Hong.

His estimate was triple the 1 trillion yuan announced for earthquake reconstruction by the National Development and Reform Commission, the top central planning agency, early this month.

[skyjet]

China newly injects 4.4 billion yuan into education
November 25, 2008

China will newly injects an investment of 4.4 billion yuan in the fourth quarter of this year to improve education in China's central and western regions, according to a press conference held by the Ministry of Education on Nov. 24.

The 4.4 billion yuan will be mainly targeted at the improvement of education in the rural areas of the central and western regions, with the focus on the construction of hardware facilities. Over 2,000 schools and more than 1 million students will benefit from the project.

Three billion yuan out of the funds will be earmarked for school renovation in rural areas with over 1,600 schools being set up or renovated. The project will provide accommodation for more than 400,000 resident students.

One billion yuan will be used to strengthen the basic fundamentals of secondary vocational education, primarily referring to the schools' building and expansion, while also providing teaching equipment. Nearly 360 schools will benefit from this.

Four hundred million yuan will be earmarked for the building of schools for special education, including classrooms, rehabilitation training rooms and accommodation. 120 such special education schools are expected to be set up.

By People's Daily Online

[skyjet]

Manufacturing Slows Sharply In China

November data show that with export orders down and backlogs shrinking, factories are cutting workers.
If there was any doubt that Beijing's economic mandarins need to step on the gas pedal, official and private-sector data released Monday provided grim confirmation.

Manufacturing activity declined sharply in November, as measured by the official purchasing managers' index, or PMI. The index fell to 38.8 from 44.6 the month before, the China Federation of Logistics and Purchasing said Monday. A reading below 50 indicates contraction.

The brokerage firm CLSA said that November marked the first month in which weakness in overseas demand was truly felt, compounding what previously had been mainly a domestic slowdown. CLSA's own manufacturing PMI reading fell for a fourth straight month to 40.9, from 45.2 a month ago, as its survey showed a slowdown in orders is leading companies to shed workers.

"Export orders will weaken further and we expect further cuts in production and employment," said Eric Fishwick, head of economic research at CLSA. "Costs are plummeting but the benefit to margins is being offset by output price cuts as businesses try to protect market share."

CLSA's new export orders index plummeted to 28.2 in November, from 44.3 in October. With backlogs down and inventories rising, CLSA's seasonally adjusted employment index fell to 46.0 from 48.2 the month before, indicating that manufacturers are responding by reducing their workforces.

That's a worrying sign for the ruling Communist Party, which has premised its legitimacy on delivering economic growth, and has depended on an expanding manufacturing sector to soak up rural Chinese who come to the east coast to find work. A downturn could lead to a sustained rise in unemployment, threatening stability.

After the pace of economic growth slowed in the third quarter to 9.9%, a half-decade low, the government announced Nov. 9 a 4 trillion yuan ($585 billion) stimulus package focused on upgrading infrastructure, raising rural incomes via land reform, and social welfare projects such as affordable housing and environmental protection.

Jeremy Bogaisky

[skyjet]

04 Dec 2008

The central bank has shifted the central peg of its dollar band twice this week in a calculated move that suggests Beijing aims to offset the precipitous slide in Chinese manufacturing by trying to gain further export share abroad.

The futures markets are pricing in a 6pc devaluation over the next year. "This is clearly a big shift in policy and we are now on alert," said Simon Derrick, currency chief at the Bank of New York Mellon.

The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market".

China has allowed a crawling 20pc revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington. Mr Obama called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law.

Outgoing US Treasury Secretary Hank Paulson is viewed as a "friend of China". He called for a stronger yuan this week before embarking on a visit to Beijing, but the plea was couched in friendly terms. This soft-peddling may soon change.

Hans Redeker, currency head at BNP Paribas, said China's policy switch could set off a dangerous chain of events. "If they play this beggar-thy-neighbour game, it will cause a deflationary shock for the whole world," he said.

It makes sense for countries with current account deficits such as the UK, US or Turkey to let their currencies fall, but China has the world's biggest trade surplus.

Michael Pettis, a professor at Beijing University, said it was "very worrying" that a pro-devalulation bloc seemed to be gaining the upper hand in the Communist Party. "I really do believe that we are on the brink of a very ugly period for trade relations," he said.

China has relied on exports to North America and Europe as its growth engine, making it acutely vulnerable to the contraction in global demand. Mr Pettis said this recalls the role played by the US in the 1920s, a parallel fraught with danger. "In the 1930s the US foolishly tried to dump capacity abroad, but the furious reaction of trading partners caused the strategy to misfire. China already seems to be in the process of engineering its own Smott-Hawley," he said, referring to the infamous US Tariff Act in 1930.

China showed restraint during the Asian crisis in 1998, holding the line against domino devaluations across the region. It may yet hold the line this time.

However, this crisis is more serious. The manufacturing sector has seen the steepest decline since the records began, with devastation sweeping the textile, furniture and toy sectors. Civil unrest has begun to rock the Guangdong and Longnan regions.

Beijing has slashed rates and unveiled a fiscal stimulus of 14pc of GDP, but most of the spending comes in the form of instructions to local governments to spend more – but without giving them the money.


Ambrose Evans-Pritchard