China Works blog: China manufacturing news, analysis and insights

Something unheralded is happening in Chinese economy. China’s large manufacturers are continuing to lose money – a lot of it. After almost two decades of consistently upward growth curves, buyers have postponed queueing for access to the Factory of the World. Consequently the first five months of 2009 saw the combined profits of China’s major industrial companies drop 22.9 per cent year on year.

At the same time, however, signs are that the Chinese economy is beginning to ride a stronger wave. The 22.9 per cent January-May drop in industrial profits compares favourably with the 37.3 per cent drop year on year in the first two months of 2009. Operating costs in the first five months of 2009 also dropped by 0.9 per cent year on year. Meanwhile, the World Bank has revised its 2009 China GDP growth figure, to 7.2 per cent from 6.5 per cent, citing its fiscal policies that have enabled the Chinese economy to  “grow respectably.”

The coming months will be pivotal for the long-term health of China’s industrial sector. Some analysts predict a wave of consolidation, including several mergers and acquisitions. Others argue that China’s economy will largely pick up where it left off in mid-2008, and grow faster than expected in the second half of 2009, and that industrial manufacturing will benefit from both expanded government expenditure in major infrastructure projects and the continued strength of Chinese retails sales.

This week’s commercial controversy in China centred around the Beijing government’s “Buy Chinese” directive that gives domestic manufacturers, construction companies and logistics providers priority – some would argue “exclusivity” – in winning contracts related to China’s RMB4 trillion stimulus package.

The desire to protect and benefit Chinese companies is understandable in a tough economic environment where sluggish overseas demand has hit the nation’s export-focused manufacturing and industrial base hard. However, foreign trade organisations, notably the European Chamber of Commerce, have long-since warned of a coming rise in Chinese protectionism related to its domestic economy, and the advancing of discriminatory policies that favour Chinese companies over their international competitors.

China has rejected the accusations. “The purpose of issuing the notice is to ensure a fair and competitive market,” Foreign Ministry spokesman Qin Gang told a press conference this week. He added that the notice complied with China’s 2002 government procurement law “and international common practice,” and argued that foreign enterprises and products “would face no discrimination.” This debate seems certain to continue in the months ahead.

The underlying financial strength – and global aspirations – of Chinese heavy industry manufacturing companies was underlined this week, when a relatively unknown Chengdu-based company, Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd, announced a preliminary agreement to purchase troubled US automaker’s GM’s highly-cherished Hummer vehicle brand.

The deal caught many China-watchers off-guard, as many analysts were expecting a Chinese car brand, not a heavy industry company, to become the first Chinese purchaser of a U.S. auto brand and manufacturing and distribution capabilities.

To read more about the deal, visit:

http://www.bizchina-update.com/content/view/2287/2/

While export volumes between China and the United States and Europe are currently down, Chinese manufacturers are looking for new markets, such as the Middle East.

Ben Simpfendorfer, who is the RBS Chief Economist in Hong Kong, is a veteran of both China and the Middle East and his new book, The New Silk Road, looks at how “the centre of the world’s economy is shifting east.”

Earlier this year, China became the major supplier of exported products to the Middle East, a rank the United States had claimed since the early 1960s.

The extraordinary element, Simpfendorfer notes, is that Chinese imports into the Middle East largely comprise low-cost manufactured items that some 200,000 Arab traders purchase on visits to manufacturing markets like Yiwu, in Zhejiang province, while the United States trade in the region is mostly in high-cost items, such as “SUVs and Boeings.”

The current “flood of Chinese exports into the Middle East” is not without future risks. Factory closures and increased unemployment across the Middle East are two noticeable ramifications. “If trade barriers aren’t raised [Syria, for example, has just raised tariffs on certain imported goods from China], then that brings the risk of social instability,” Simpfendorfer says.

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Discussion is raging about the exact status of China’s economy – which, for now, appears heavily reliant on government capital investment. The export sector took a heavy hit in the second half of 2008, and sluggish demand in the US and Europe has continued to depress the prices of many exports. So, what is the current state of manufacturing, and is the much-touted swing toward producing for the local Chinese economy and away from a reliance on exports actually happening?

The main problem in answering such questions is China’s preference for year-on-year economic statistics. Given the global turmoil of the past eight months, setting current figures against those from one year ago is no longer a like-for-like comparison. Month-on-month statistics are a much more accurate barometer.
In truth, the signs are mixed. On the positive side, retail sales in China held up strongly in the first quarter, industrial output of building materials rose 14.4 per cent between January-April, while industry factory prices rose 0.28 per cent in April compared to March, the first monthly rise since October. On the other hand, industrial production slowed by one per cent in April compared to March, and concerns remain of deflation as Chinese buyers hold back on certain purchases in the expectation of further price falls.

This article, written by a Shanghai-based consultant (http://www.bizchina-update.com/content/view/2239/44/), explores signs that China’s macroeconomy has started to climb an upward curve – note, particularly, the monthly export/import figures between April 2008-April 2009