「世界工廠」透不過氣了 Chinese factories choke on complex cocktail

At the Winfire cigarette lighter factory in the eastern Chinese city of Wenzhou, Hannah Sun, the foreign trade manager, does not need economic data to know that manufacturing in China is struggling.

Earlier this year, a big overseas client stopped new orders at the company because of global uncertainties, forcing the factory to sack about 40 of its 100-strong workforce.

「The situation is even worse for shoe manufacturers,」 Ms Sun says. 「This is normally a very busy time for them but this year lots of shoe factories have just stopped production altogether and many migrant workers have been fired and returned home.」

Millions of factories like Ms Sun』s are being squeezed on all sides by rising costs, labour shortages, shrinking margins and a collapse in new orders from overseas. Many small manufacturers face going out of business thanks to government policies and immutable demographic and economic forces that make low-end production in China increasingly untenable.

China』s official purchasing managers』 index for November shows this trend playing out across the country as the manufacturing sector, which officially makes up about 50 per cent of gross domestic product, contracted for the first time in almost three years. The index, released on Thursday, fell to 49.0 in November, down from 51.4 in October, dropping below the 50 reading that separates expansion from contraction. Readings for new orders and new export orders point to worse to come, with factories already laying off workers, buying fewer raw materials and cutting production.

「China』s PMI tells a simple story: an across-the-board, deepening slowdown in the country』s manufacturing sector,」 said Stephen Green, head of research for greater China at Standard Chartered.

The first and most obvious reason for the slump in manufacturing is the decline in global demand, particularly from embattled economies in Europe. David Liu, president of Luca Angelo Leather Product in the southern industrial town of Dongguan, says his company』s exports to Europe have dropped by up to 40 per cent in the last two months and, although orders from the domestic market have held up, his costs are rising.

「Suppliers ask for payments without delay and that adds to our finance costs,」 Mr Liu said. 「Banks are strictly controlling loans to [small and medium-sized enterprises] and many of my friends are considering cutting production.」

Mr Liu』s comments highlight the longer-term challenges facing manufacturers of low-tech products in China』s coastal manufacturing belt, which until recently was better known as the workshop of the world. Falling orders come as many companies face higher prices for raw materials, restricted access to credit and greater environmental compliance and labour costs. For years, Beijing has promoted policies aimed at moving manufacturing up the value chain and actively discouraged the state-owned banking system from lending to small, low-tech producers such as Winfire. But with a huge portion of Chinese manufacturing still in low-end industries such as textiles, rising costs and inadequate access to credit mean many producers are being slowly strangled rather than climbing the technology ladder.