November 24, 2008

AND THEY'RE DECLINING FROM SUCH LOW HEIGHTS:

The beginnings of a disintegrating China - Part I (David DuByne, 24 November 2008, Online Opinion)

I sat in disbelief reading a recent Shenzhen local paper stating that “Some 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan and Shenzhen are expected to close down in the next three months according to the Dongguan City Association of Enterprises with Foreign Investment estimates. Those closures would see up to 2.7 million jobs cut as overseas demand for consumer goods and clothes fades.” That’s more than 50,000 a day if you believe official figures, which I do not, and I believe the number is actually higher.

The association says that, by end of January, demand will shrink by 30 per cent, and these are just mainland factories. The Federation of Hong Kong Industries said that about 25 per cent of the 70,000 Hong Kong-owned companies in southern China "could go to the wall by the end of January". Yet on the very next page I read an article quoting the Ministry of Commerce as stating, “Although it is likely to cause a decline in China's external demand, our stock market and financial system will not be fundamentally affected”.

I can understand the flip-flopping stories as a means to keep a population from panicking; after all the Shanghai A-shares have declined more than 60 per cent from their bubbly peak at the beginning of the year. The Hang Sang in Hong Kong and the Shenzhen indices are not doing much better. Real estate prices have slipped 20 per cent in the last six months, all of the recent factory closings with many more to come and this is just the beginning of a prolonged feedback loop.

The central government's plan to reverse a foreign trade decline is to increase domestic consumption, restructure industry and boost innovation to change its economic development mode; that’s fine but first you need to have an expanding domestic economy to do that.

Number one on the priority list is domestic unrest caused by factory closures and owners declaring bankruptcy, thereby avoiding the troublesome task of paying their employees. In the last three weeks Dongguan Weixu Shoe Company collapsed and laid off 2,000, Chong Yik Toy Company shut leaving 1,000 without pay. The largest, Smart Union, locked its gates on 7,600 workers. Protesters descended on government buildings in Dongguan where hundreds of police were called out to quell violence.


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Posted by Orrin Judd at November 24, 2008 7:02 AM
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