Chinese Industry on the Brink of Collapse

Xinhua news is reporting that small riots have broken out in parts of China, due to factory closings. As a point in fact, more than 50% of Chinese toy makers have gone bankrupt in 2008.

Without a doubt, this will lead to much higher prices here in the states. I must be out of my fucking mind being long equities.

“This financial crisis in America is going to kill us. It’s already taking food out of our mouths,” the 42-year-old laborer said Friday as he stood outside the shuttered Smart Union Group (Holdings) Ltd. factory in the southern city of Dongguan.

The company, which has struggled as global growth has slowed in recent months, employed 7,000 people in mainland China and Hong Kong. It wasn’t immediately clear how many have lost their jobs.

DONGGUAN, China (AP) — Unemployed worker Wang Wenming was angry at his boss for shutting down a massive Chinese factory this week that made toys for Mattel Inc., Hasbro Inc. and other American companies.

But the assembly line worker was also furious at the United States.

“This financial crisis in America is going to kill us. It’s already taking food out of our mouths,” the 42-year-old laborer said Friday as he stood outside the shuttered Smart Union Group (Holdings) Ltd. factory in the southern city of Dongguan.

The company, which has struggled as global growth has slowed in recent months, employed 7,000 people in mainland China and Hong Kong. It wasn’t immediately clear how many have lost their jobs.

Economic upheaval in the U.S. is already changing and shrinking China’s vast manufacturing hub in the southern province of Guangdong, long regarded as the world’s factory floor. However, factory closures won’t just be a China problem — shoppers will feel the effect in malls and stores in the U.S. and Europe.

“When these companies go bust, the outcome is higher prices,” said Andy Xie, an independent economist in Shanghai. “Labor costs have gone up 70 to 100 percent in the last three or four years. But these guys have not been able to raise their prices because Toys “R” Us, Home Depot and Wal-Mart are saying no price increase. How is that possible?”

For years, there were too many factories competing to win bids from foreign buyers demanding prices that were often unrealistically low. The winners were American and European consumers, who enjoyed rock-bottom prices.

But many factories were scrimping on materials and stiffing their suppliers just to survive, Xie said. The financial crisis will be the final culling factor that forces many wobbly factories to go belly up and end an unsustainable situation, he added.

Already, China’s toy industry is hurting. The official Xinhua News Agency reported this week that 3,631 toy exporters — 52.7 percent of the industry’s enterprises — went out of business in 2008. The causes: higher production costs, wage increases for workers and the rising value of the yuan, the report said.

Nor is Christmas likely to make much difference. Big toy giants generally put in their Christmas orders months in advance so toys can be shipped to them in time.

Even before the financial crisis, China’s exports were dropping because of the slowdown in America and Europe. For the first time in three years, the growth rate for Chinese exports in the first quarter of 2008 declined, according to customs figures.

Chan Cheung-yau, chairman of toy and games subcommittee under the Chinese Manufacturers’ Association of Hong Kong, agreed that the outlook was gloomy for toy makers. He predicted that thousands more factories would close in China next year.

“The tightening credit market has made it more difficult for manufacturers to raise funds,” he said. “It has created a huge cash flow problem.”

Workers at the Smart Union toy factory said that for several months the plant was less busy and paychecks were arriving late.

“The management said the problem was that our American customers weren’t paying for the goods they ordered so the company couldn’t pay us,” said worker Shao Xiaoping, who was still wearing his blue company shirt with a red patch above the pocket that said “Smart.”

He was among 100 workers who on Friday gathered outside the gates of the factory, a sprawling five-story complex covered in white and blue tiles discolored by dust and smog. About 2,000 other laborers protested outside the local government’s offices, demanding that the Hong Kong-based company pay their wages, severance and other benefits. The building was guarded by a line of 50 riot police with shields and clubs.

The workers said the Hong Kong-based owner of the factory didn’t warn them before the plant closed Wednesday.

“I’ve been working here for eight years. I have no idea whether I’ll ever get paid. The government says we will, but I’m not optimistic,” said a man in a white sleeveless undershirt who would only give his surname, Zhang. Most workers wouldn’t completely identify themselves for fear speaking to the press would cost them their wages.

A sign posted by the local government on the factory gates said workers could be detained for 10 to 15 days for stirring up unrest, unlawful gathering, protesting and ignoring orders from security officials.

Calls to Smart Union’s offices in Hong Kong went unanswered. On Friday, the company said in a filing to the Hong Kong Stock Exchange that it informed Hong Kong’s High Court that is has stopped operating and was seeking buyers.

Last year, the company, listed on Hong Kong’s stock market, said in a financial report its core customers included Mattel, Hasbro and Spin Master Ltd. The company’s stock was suspended from trading Wednesday.

In another report this year, the company reported a pretax loss of US$25.9 million (HK$201 million) in the first six months.

Higher manufacturing costs — including a 20-percent rise in the cost of plastic — took a big bite out of profits, along with the 7 percent appreciation of the yuan, it said. The company was also hammered when Mattel and other toy giants recalled millions of Chinese-made toys last year because of safety concerns, the company said.

Although Smart Union wasn’t directly involved in those recalls, “the product recall incident badly affected the toy industry,” it said.

Most of China’s toy factories are in Guangdong province — the main laboratory for the bold economic forms China began 30 years ago when it began shifting away from communism. The province was a good place to start dabbling with capitalism because it shares a border with Hong Kong, the main gateway into China for foreign investors.

Companies from Hong Kong, Taiwan, America and Europe flooded into the province to set up low-cost factories that made everything from sneakers and bras to laptops and iPods. The booming region close to Hong Kong became known as the Pearl River Delta.

Most of the factory closures are happening in the Pearl River Delta, and the changes didn’t seem to bother one of the province’s highest-ranking economic officials, Vice Governor Wan Qingliang.

In a briefing with foreign reporters this month, Wan said the global economic crisis wouldn’t deter the provincial government from pressing on with a sweeping plan to restructure the Pearl River Delta’s manufacturing base. He said the government wanted low-end factories to move farther into China’s interior so that they could be replaced with more high-tech, advanced industries.

“We have a policy to empty the cage for the new birds,” he said. “The ultimate target is to build the Pearl River Delta into the core region of modern manufacturing.”

If the strategy works, China might eventually come out of the toy crisis stronger.