How Many Chinese Factories Are In Danger?

In the April 28th issue of the times, the original question: the Chinese factory in danger is a miracle economic growth in China, built on the sweat of Cheng Weiguan's businessman and the sweat of 800 workers he employs.

Cheng Ji Ji, a wood products company, exports $10 million annually to toys and children's furniture, together with thousands of other small manufacturers to form the backbone of China's daunting export processing machine.

But there are cracks in the structure.

Over the past two years, the cost of the company has risen by 30% every year, and fierce competition has prevented him from raising the price.

"The profit stream has gone," Cheng said. "If we haven't changed much in the next few months, we will have to close."

Change will come, but it is almost certain that it will get worse.

Rising labor costs, rising Renminbi and soaring raw material prices are bad enough. Now global economic slowdown and the likely full economic recession in the United States will bring unprecedented blow to China's manufacturing industry.

In early 2007, there were 3000 shoe factories in Huidong, Guangdong. In the past 15 months, up to 500 shoe factories have been closed down.

Although China is the second largest exporter in the world, its dependence on overseas trade is not as high as in some other countries.

In 2006, exports accounted for 36.8% of China's GDP, while South Korea's proportion was 43.2%.

However, China may be particularly vulnerable in the face of weaker international demand because China has built too many new factories in recent years.

The Chinese government realized earlier that investment bubbles may be taking shape.

In 2004, Beijing began to put pressure on local governments to curb investment in aluminum plants and cement plants.

But local officials often ignore the ban.

Building more factories means providing more jobs and bringing more economic growth, and will also be appreciated by their superiors.

Not only that, but because local officials can get land and issue permits for new projects, they become silent partners of new manufacturing enterprises.

As a result, too many factories were built up.

Overcapacity means that China's export machine is like a car without brakes.

As long as the road is smooth and straight, the car will go straight ahead.

Once encountering the pits and sharp turns, the wheels will fall off.

The factory has been able to increase production in recent years because the global economy has been growing.

But that may be coming to an end.

Most economists predict that global GDP growth will decelerate significantly in 2008.

The global slowdown will "expose China's excess capacity".

Li Peng, Secretary General of the Asian Footwear Association, said: "the cake is so big, but there are so many people who want to eat it. There is no doubt that some people will starve."