Rising desperation as China's exports drop
By Keith Bradsher
Thursday, January 1, 2009

HONG KONG: At the docks here, the stacks of shipping containers that used to loom above the highway overpass are gone. Logistics managers say they negotiate deeper discounts every week on ships that are leaving half empty.

In nearby Guangdong Province, so many factories are closing without paying employees that some workers are resigning pre-emptively and demanding immediate pay before their employers go bankrupt.

In Sichuan and other interior provinces, municipal officials are desperately searching for ways to provide jobs for millions of out-of-work migrant laborers whose families no longer need them for farming.

Those are the effects of millions of Americans' cutting their spending.

American retailers, after suffering a dismal holiday shopping season, are delaying payment for Chinese goods 90 or even 120 days after shipping, in contrast to the usual 30 to 45 days, requiring their suppliers to try to borrow more money to cover the difference. Some Chinese suppliers who cannot raise the money - many already operate on thin margins - are going out of business.

At the same time, retailers are demanding that exporters show that they have strong balance sheets and will not go bankrupt before completing orders. Exporters, worried the retailers will fail before paying for their purchases, are reluctant to let goods be loaded onto ships. And banks, for the same reason, have cut back on guaranteeing retailers' payments to exporters.

"Trade finance is collapsing," said Victor Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. "We've got orders we can't ship right now."

Fung estimates that 10,000 of the 60,000 factories in China owned by Hong Kong interests have closed or will close in the coming months.

Other business leaders say that the toll may be even higher and that factory closings are an even bigger problem among mainland Chinese businesses because these tend to be smaller and more poorly capitalized than those owned by Hong Kong businesses.

Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But dollar figures do not come close to capturing the real depth of the downturn.

Convert the export figures into China's own currency, a much better measure of the effect on the Chinese economy, and exports plunged 9.6 percent in November. Factor in inflation over the past year and the plunge was 11.4 percent.

Indications are that the December data will be even worse.

Consumer electronics manufacturers have been hit the hardest, according to customs data. "No one has any money anymore, so demand for our mini hi-fi systems has declined a lot," said Lion Yuan, the sales manager at Shenzhen Yidashi Electronics, where exports have dropped 30 percent in a year.

In the past two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and midsize exporters.

Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks' issuance of $12.9 billion worth of letters of credit for exports.

Particularly noteworthy have been the Chinese government's steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development, moving to more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.

China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the past two years in some cities, peaking at $146 a month in Shenzhen, which abuts Hong Kong.

"China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries," Li Yizhong, the minister of industry and information technology, said at a conference Dec. 19.

Increased export incentives by China have the potential to create a trade issue for the incoming U.S. administration of Barack Obama, particularly regarding textiles.

U.S. quotas on the import of a wide range of Chinese garments expired Thursday. Even before the Chinese began announcing their latest programs for exporters, the United States filed a legal challenge Dec. 19 at the World Trade Organization, accusing China of having already provided illegal subsidies to exporters in a long list of industries as part of a program of trying to build recognizable export brands.

China denied Dec. 23 that there were any illegal subsidies, saying that many countries tried to help exporters and that its actions were no different.

In a letter to the National Council of Textile Organizations on Oct. 24, Obama stopped short of promising any protection from Chinese imports, but he said he favored close monitoring of them. "China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for its growth," he wrote.

But shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world's highest savings rates. And the Chinese social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement: The average hospital stay costs the equivalent of two years' wages for the average Chinese worker.

Important bureaucratic obstacles also exist. Chinese factories are allowed to import equipment while paying little or no duty, provided that the equipment will be used only to produce goods for export.

Obtaining approval to switch the same equipment to making goods for the domestic market can take two years and require the payment of much of the import duties previously avoided, a payment many factories cannot afford.

China's measures to help exporters are starting to cause concern in other Asian countries that compete with it, and raise the risk of a protectionist reaction against China. Indonesia, one of the largest Asian markets, imposed a series of administrative measures Thursday that were meant to reduce smuggling but will have the practical effect of making it harder to import Chinese goods.

In Indonesia, the third most populous country in Asia after China and India, the government is already acting to limit imports of garments, electronics, shoes, toys and food - five large categories in which Indonesian producers are struggling to compete with China.

Starting this year, importers of these products will have to be registered with the government, use only five designated ports for their shipments, arrange for detailed inspections of goods before they are loaded on ships or planes bound for Indonesia and then have every single container exhaustively inspected on arrival by Indonesia's notoriously slow customs bureaucracy. The plan, intended to comply with WTO rules, was adopted after heavy lobbying by Indonesian manufacturers and labor unions.

Boediono, the governor of the central bank of Indonesia, who uses only one name, said that Indonesia would be watching China's policies, but he added that he hoped Indonesia could stay competitive. At less than $120 a month, industrial wages in export zones near Jakarta, the Indonesian capital, are slightly below those in coastal regions of China.

"I'm not sure they can compete with us again by moving down the ladder," Boediono said, "because I think they have already moved up the ladder."