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China Fails to Decouple

Written By Brian Hicks

Posted October 20, 2008





As the U.S. Economy stumbles, and all of Europe teeters, the resulting slowdown in China is becoming more and more apparent.

In fact, the Chinese Gov’t announced today that its own GDP growth had contracted to a mere 9.8% in so far for the year, down significantly from last year’s 11.9% figure.

That was the slowest rate of growth since 2003, offering further proof China is not immune to growing world wide financial problems.

“There are no signs of a definite recovery from the financial crisis,” bureau spokesman Li Xiaochao said in a nationally televised news conference. “The growth rate has moderated,” Li said.

So you can forget all that hopeful talk that China somehow had become “decoupled” from western consumers—-it was always a myth.

In fact, here’s story from the Associated Press that tells the tale of dramatic cuts backs in Chinese toy manufacturing. Amid a slowing U.S. consumer, 3,631 toy exporters – 52.7 percent of the industry’s enterprises – went out of business in 2008.

It’s in an article by William Foreman entitled: 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.

The company, which has struggled as global growth has slowed in recent months, employed 7,000 people in mainland China and Hong Kong. It wasn’t immediately clear how many have lost their jobs.

Economic upheaval in the U.S. is already changing and shrinking China’s vast manufacturing hub in the southern province of Guangdong, long regarded as the world’s factory floor. 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.

Already, China’s toy industry is hurting. The official Xinhua News Agency reported this week that 3,631 toy exporters – 52.7 percent of the industry’s enterprises – went out of business in 2008. The causes: higher production costs, wage increases for workers and the rising value of the yuan, the report said.

Nor is Christmas likely to make much difference. Big toy giants generally put in their Christmas orders months in advance so toys can be shipped to them in time.

Chan Cheung-yau, chairman of toy and games subcommittee under the Chinese Manufacturers’ Association of Hong Kong, agreed that the outlook was gloomy for toy makers. He predicted that thousands more factories would close in China next year.”

The entire article by the way is one great read. Keeping the people happy there is one tall order.

It fascinates me to no end.