Back in 2008 when the financial crisis first struck Asia, the Pearl River Delta witnessed a wave of factory closures. Today, China’s economic rebalancing has again raised concerns over the ability of Chinese factories to survive and prosper. In order to get a more comprehensive perspective on this issue, CLB talked to workers, industrial insiders, economists and government officials about their views.
A worker from a Taiwan-owned shoe factory in Dongguan with 5,000-6,000 employees said export orders from the Netherlands had decreased and his boss was trying to squeeze more out of the workers. Management was offering a bonus of 500 yuan to employees who could meet the weekly production target, but the worker pointed out that each day’s quota was very high making it difficult to reach the weekly target.
A sales representative at a Shenzhen mobile phone factory with over 10,000 workers said his company’s business had definitely been affected by the crisis in Europe and that many smaller mobile phone companies in Pearl and Yangtze River Deltas had already gone out of business.
However, his company had not undertaken any substantial moves to upgrade equipment because such moves were deemed risky, especially in volatile times. “The management is trying to provide value-added service in our software, but it’s easier said than done,” he said, adding that the safest way for the business to stay afloat was to expand sales capacity.
A Guangzhou restaurant owner meanwhile noted that China’s putative “factory to the world,” Dongguan, is clearly no longer the boomtown it used to be. “If you take a stroll around the town, you can easily see broken down factories. Their products no longer sell.”
The preliminary HSBC China PMI, a key indicator of manufacturing activity, fell to 48.7 in May, showing manufacturing activities continue to soften, largely owing to sluggish export order growth.
But Stephen Schwartz, chief economist-Asia at BBVA Research in Hong Kong, said he doesn’t see declining exports as a systematic problem at this stage because there’s enough demand on the domestic front. In the future, he said, it’s going to be very important for China to move to higher-valued added manufacturing and to increase productivity in order to offset higher wages. Although it’s a very slow process, he added, China’s ability to catch up quickly and do things quickly is always underestimated.
Another key challenge for Chinese factories has always been access to credit but that appears to be getting easier. According to a statement posted on the Shenzhen Stock Exchange website on 21 May, for example, China will next month allow small and medium-sized firms to issue bonds through private placements.
In addition, as Paul Au, a managing director at UBS Asia, pointed out, the role that Hong Kong plays in offering loans to mainland SMEs cannot be ignored either. A number of small private enterprises in China are looking at Hong Kong as an alternative funding channel and utilizing Hong Kong’s yuan-denominated “dim sum bond” market to raise funds. But Au noted that there are other complications or considerations that need to be taken into account, such as regulatory restrictions. The minimum bond issue for an SME is estimated to be around 100 million yuan.
Charles Ng, associate director-general of investment promotion at Invest Hong Kong, a government body, said mainland manufactures are able to tap into more resources if they have set up operations in Hong Kong. Ng also observed a recent trend of mainland firms expanding outside China and using Hong Kong as a springboard.