China Works blog: China manufacturing news, analysis and insights

The government-driven consolidation of China’s state-owned enterprise (SOE) sector continues. The State-owned Assets Supervision and Administration Commission (SASAC) has reported that the total number of Chinese SOEs has now shrunk to 132, from 135, following three more recent mergers. China’s State Council has approved the merger of Changsha Research Institute of Mining and Metallurgy and Luzhong Metallurgical Mining Group as subsidiaries of China Minmetals Corp. Meanwhile, China Xinxing Corp (Group) is now a subsidiary of China General Technology (Group) Holding, Ltd.

The State-owned Assets Supervision and Administration Commission was set up in 2003 to control the rationalization of the 196 SOEs then in existence. Today’s total of 132 centrally-administered SOEs is targeted to be whittled down further, to “between 80 and 100” by the end of 2010, according to a commission spokesperson.

China’s export volumes may still be dropping as a result of still sluggish global demand – total exports for the first three-quarters of 2009 fell 21.3 per cent year on year, to USD846.65 billion – but the ongoing investment in export infrastructure may reap significant dividends for one of China’s fastest-growing ports.

Dalian port, located in Liaoning province on the northeast coast, plans to raise RMB2.8 billion from an IPO on the Shanghai Stock Exchange, scheduled for April 2010. The share sale would make Dalian the first port in China to have a dual listing on both the Hong Kong and Shanghai stock markets.

The funds raised by Dalian Port’s IPO will be channelled towards expanding this year’s expected throughput of 46 million twenty-foot containers by 10 per cent in 2010. The port’s bold growth plans come despite a 49 per cent drop year on year in net profit for the first half of 2009.

So, is the recession really over? The signs are that, while a hoped-for recovery is a long way from reality in most global economies (Russia, for example, is predicting negative economic growth of -6.5 per cent this year), the Chinese manufacturing sector may at have emerged from its darkest late-2008 days – and is showing renewed signs of sustainable life.

The Chinese manufacturing sector’s Purchasing Managers’ Index rose for a seventh consecutive month in September, according to the China Federation of Logistics and Purchasing. The index inched up to 54.3 (on a scale whereby a mark of 50 signals expanded activity), rising 0.3 percentage points compared to August.

At the same time, the International Monetary Fund has raised its forecast for China’s 2009 economic growth to 8.5 per cent (up from 7.5 per cent). Chinese growth for 2010 is projected to be slightly up on 2009, at 9 per cent.

Manufacturers worldwide will be eagerly following the next stage of an escalating trade dispute between the United States. and China regarding vehicle tyre exports. Last week, President Barack Obama agreed to impose three-year tariffs on the import of all light truck tyres from China.

The tariffs have infuriated China, which responded by calling the move an “act of trade protectionism.” In addition, China says it will conduct its own investigation regarding “anti-dumping and anti-subsidies” of some automobile and chicken products originally produced in the United States. China is also referring the tyre tariffs case to the World Trade Organisation, of which it became a member in late 2001.

The dangers of this dispute escalating into a real trade war are real, particularly as US media is reporting that other industrial sectors in the United States are also lobbying for similar protective measures against cheaper and, often, subsidised Chinese imports that are resulting in slashed margins and job losses. If this happens, China will be forced to transfer its export focus elsewhere for products that attract imports tariffs into the United States. The Chinese government has already said that tyre exports will now be concentrated on the ASEAN countries, Africa, Eastern Europe, the Middle East and South East Asia. Manufacturers and distributors already operating in those markets should prepare for stiffer price and product competition in the coming months.

China’s manufacturing sector enjoyed a productive August, expanding at its fastest monthly rate so far in 2009, according to the Chinese Federation of Logistics and Purchasing. The Federation’s manufacturing purchasing managers index rose to 54, up from 53..3 in July – marking the sixth straight month of growth. The Federation’s index of new orders, however, remained unchanged from the July mark of 55.

We have long advocated running the official PMI through a seasonal adjustment program as even though the figures are claimed to be adjusted for seasonal effects they aren’t adjusted very well,” commented Eric Fishwick, Head of Economic Research, CLSA Asia Pacific Markets. “ Seasonal affects account for some for some of the August increase but not all – manufacturing is continuing to accelerate.”

A shortage of labour? In a country of 1.3 billion people? After millions of migrants were laid off when thousands of factories closed in the aftermath of the global economic crash?

China’s complex labour situation regularly confounds overseas observers – not least because the ‘free movement of people’ theory is simply not applied here. For unskilled (or even skilled) workers to obtain jobs in another city or province to that in which they are registered citizens requires an enormous amount of bureaucracy – and persistence.

Before the global crash, the system, of course, had a few inbuilt checks and balances – to ensure that the ‘Factory of the World,’ which relies heavily on migrant labour, could function. However, with millions of scorned (and often, unpaid) migrant workers having returned to the hinterland, attracting them back is not proving as quick or as easy as manufacturers might hope.

Hence, a report this week in state media that although east-coast factories in some sectors are noticing an upturn in export orders and production schedules, many are struggling to find workers to fulfil them.

According to the report, the factories suffering labour shortages tend to be small and medium-sized operators in the industrial heartlands of Zhejiang and Guangdong – both of which are major employers of migrant workers from inland China. Wenzhou, in Zhejiang province, a city where garment orders rose 10 per cent year on year in July, has a rural labour shortage of around 150,000 workers, according to official figures. Garments and shoes account for 45 per cent of the city’s exports.

Balancing the issue of labour shortages in fast-expanding cities and rapid urban migration is a major challenge for the Chinese government – which this week estimated that around 300 million rural Chinese will migrate to the cities in the next 20 years (see here for more details: http://www.bizchina-update.com/content/view/2576/2/).

China, Christmas has become big business for Chinese manufacturers in recent years – and not just because of the huge volume of toys, consumer electronics and gift items produced and shipped worldwide from the Middle Kingdom. China is also the largest producer of Christmas trees and decorations, which are traded to wholesalers in vast commercial marts like Yiwu, Zhejiang province.

The summer of 2009, however, is turning into a less-than-stellar sales period for the Chinese Christmas trade. June and July are typically the months when buyers from around the world head for places like Yiwu to purchase their supplies of Christmas trees, decorations and lights. But, as the attached article from the UK-based The Guardian newspaper reveals, Santa’s stocking may be a little emptier than expected this year

The need for inbound economic realism is simple. China’s realises (and actually knew this long in advance of the global recession) that its economy requires massive restructuring over the coming years. International demand for cheaply produced goods has fragmented, and – according to July’s export figures, which fell 23 per cent year on year – is continuing to do so.

In addition, Fu Ziying, China’s Vice Minister for Commerce, this week admitted that Chinese domestic consumption remains too weak to offset the slump in global demand. This admission zaps the ‘booster’ view that domestic consumption could seamlessly replace export volumes in the near future.

The domestic consumption replacement theory never was a realistic scenario at this stage of China’s growth, but the admission from a high-ranking government figure should be seen as positive as well as negative. A significant degree of economic candidness is now accompanying the slew of upbeat China statistics to which we have become accustomed. It’s all about economic realism, now.

The challenge for manufacturers is to study and address the opportunities, as well as the difficulties, that lie ahead. China’s economy is changing, and will continue to do so. And just because the figures are currently less appealing than before, China won’t stop growing either. Equally, the old certainties are dissipating. More than ever, manufacturers need to adapt and change with China. Opportunities will continue to exist, although competition will get fiercer and input prices will continue to fluctuate wildly. Planning ahead is more important than even. Just don’t rely on today’s, tomorrow’s or yesterday statistics – dig a little deeper for a more realistic appraisal of the ‘next generation’ China that is emerging.

The logic is simple – and is based on the classic marketing theory of ‘repeat, repeat, repeat’ any positive message. When an economy of the potential size of China is growing fast from a low base, the statistics should – for several years – always seem impressive, both internally and to a watching global audience. Hence the upward economic curves of the last 15 years have been accompanied by a raft of stellar percentage growth figures.

The global recession has, of course, largely derailed China’s stratospheric figures, although, as analysts frequently point out, such rapid upward growth is a relatively short-term phenomenon anyway. A maturing economy, even one built on the magnitude of China’s vast base of land and population, is not an unstoppable juggernaut. At some point in its growth cycle, it becomes bound by the same national, regional and global checks and balances as an other economy.

Which is a roundabout way of saying that China is now feeling the sustained impact of sluggish economic statistics for the first time in almost a generation – and these must be rigorously analysed by foreign investors in all segments. Not so much a case of ‘buyer beware’ as ‘buyer do your research, then check it again and again.’

Just as stock investors cannot rely on last year’s stellar picks (or its up-and-comers and underperformers) to guide tomorrow’s purchases, so manufacturing investors must now sift very carefully between the mixture of good, bad and rather ugly statistics emerging about China’s economy. Whether you are considering production output, GDP growth, industrial property prices, PMI or retail sales – check back over a period of time, not just recent months, and try to find a reliable analyst to project ahead. Because now is a time for analysis, strategic reassessment and, more than anything else, economic realism.