This has become a sign of the times: Foxconn, with 1.3 million employees the world’s largest contract electronics manufacturer, making gadgets for Apple and many others, and with mega-production facilities in China, inked a memorandum of understanding on Saturday under which it would invest $5 billion over the next five years in India!
In part to alleviate the impact of soaring wages in China.
Meanwhile in the city of Dongguan in China, workers at toy manufacturer Ever Force Toys & Electronics were protesting angrily, demanding three months of unpaid wages. The company, which supplied Mattel, had shut down and told workers on August 3 that it was insolvent. The protests ended on Thursday; local officials offered to come up with some of the money owed these 700 folks, and police put down the labor unrest by force.
These manufacturing plant shutdowns and claims of unpaid wages are percolating through the Chinese economy. The Wall Street Journal:
The number of labor protests and strikes tracked on the mainland by China Labour Bulletin, a Hong Kong-based watchdog, more than doubled in the April-June quarter from a year earlier, partly fueled by factory closures and wage arrears in the manufacturing sector. The group logged 568 strikes and worker protests in the second quarter, raising this year’s tally to 1,218 incidents as of June, compared with 1,379 incidents recorded for all of last year.
The manufacturing sector is responsible for much of China’s economic growth. It accounted for 31% of GDP, according to the World Bank. And a good part of this production is exported. But that plan has now been obviated by events.
Exports plunged 8.3% in July from a year ago, disappointing once again the soothsayers surveyed by Reuters that had predicted a 1% drop. Exports to Japan plunged 13%, to Europe 12.3%. And exports to the US, which is supposed to pull the world economy out of its mire, fell 1.3%. So far this year, in yuan terms, exports are down 0.9% from the same period last year. As important as manufacturing is to China, this debacle is not exactly conducive to economic growth.
The General Administration of Customs, which issued the report, added: “We could see relatively strong downward pressure on exports in the third quarter.”
Then there’s the plunge of the China Containerized Freight Index (CCFI), which tracks contractual rates and spot market rates for shipping containers from major Chinese ports to major port around the world. Last week, the CCFI dropped 2.4% to 798.89, near its multi-year low at the beginning of July. It is now 23% below where it was in February, and 20% below where it had been in 1998, when it was set at 1,000!
The beaten-down shipping rates are a function of an oversupply of ships and weak global demand for goods manufactured in China. Today’s export numbers once again confirm the dynamics tracked by the freight index.
Another chilling data point: imports plummeted 8.1%, after having already dropped 6.1% in June. They’re down for the ninth month in a row, in part due to crashing commodity prices. Year-to-date, imports dropped 14.6% in yuan terms.
This caused China’s trade surplus to drop 8.5% from June, to $43.03 billion.
Producer prices in July dropped 5.4% year over year, down for the 40th month in a row, the National Statistics Bureau said on today. It pushed the Producer Price Index to the worst level since October 2009. Who gets the credit? Crashing commodity prices, competitive pressures facing Chinese manufacturers, and weak demand for Chinese goods.
The yuan has remained stable against the dollar, even as the dollar has risen sharply against other major currencies, including the euro and the yen, both of which are being aggressively watered down by their respective central banks.
The strong yuan supports domestic buying power. It should support imports, but it hasn’t. It also weakens the competitiveness of manufacturers in China, which are already facing enormous cost pressures. And it allows Chinese firms to borrow cheaply in dollars and invest overseas. So the headwinds for the manufacturing sector aren’t about to subside.
And China’s foreign exchange reserves have been diving: by $42.5 billion in July, the People’s Bank of China said on Friday, the third decline in a row. At $3.65 trillion, foreign exchange reserves are at a two-year low, down 16% from their peak of $3.99 trillion in June last year.
What is causing these persistent capital outflows? According to the People’s Daily, the official rag of the Chinese Communist Party, citing a banking industry researcher: “Market expectations of an appreciation in the US dollar” and worries about weak economic growth in the second half.
Despite the 7% GDP growth published and hotly defended by the Chinese government, it is increasingly clear that the country is beset with a host of immense problems, after a debt-fueled binge of overbuilding and over-stimulating. These problems aren’t going to evaporate. And whether or not the government is willing to admit it, they’re dragging down vast sectors of the economy.
The situation in China has global automakers fretting publicly, with visions of a “downward spiral.” Read… The Unnerving Thing Global Automakers Just Said About China’s Economy
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“The company, which supplied Mattel, had shut down and told workers on August 3 that it was insolvent.”
All the Christmas toys are usually ordered in the summer months by retailers. This doesn’t bode well for a good Christmas. Mattel makes the Barbie doll, the biggest money maker in the toy business. Even in a bad economy you can expect people will spend on their kids, unless it is getting to the point, they can’t. Scary.
It seems that Mattel has a backup supplier for the things this company made. So probably the toys will show up. But Mattel is going to have some additional expenses and perhaps some write-offs.
In the mean time Wall St has been under the impression that Chinese growth engine is on a tear and caboshed hard landing after torrid growth fueled by mother of all lending since late 2008. Sure China was able stave off the Great Recession but like the Feds pedal to the metal brought about more excess for the day of the CB financial engineering reckoning..
Anyway – I passed by that massive Foxconn complex many times on the expressway and my suppliers were also Foxconn suppliers and I was frequently introduced to other suppliers and sometimes Foxconn people at giant KTVs where over 2,000 attractive girls worked to/choose from for singing/groping/and more…
My 1st trip to Chinese factory was in 1998 in GZ where I went to molding factory and saw about 100+ girls squatting on a stool hand painting McD happy meal toys outside with tarp over their head. Each girld had 2 wash basins and paint. Spent 3 + years working with Foxconn’s competitor EMS in Baoan district between SZ and DG. Most of the assy workers were young women and being US owned good working environment (despite suicides even back then). Visited Foxlink cable supplier factory nearby and it was DEPLORABLE and inhumane with strong stench of urine near latrine. I began to work with Taiwanese EMS and their excuse for not meeting the production target in 2003 was due to their inability to hire (and high turnover). I began to see more young men work in the factory floors starting 2003 and on my last visit to large PCBA firm in 2008 about 70% of the assy workers were male with salesman joking that pretty girls work in KTV/sauna/barber shops and not so pretty ones prefer restaurants over toiling at factories. He joked that fights break out in the dorms over girls. I also saw rare protest in busy intersection by workers who had not been paid block all traffic while holding hands back in 2003. We were stuck for about 30 mins and police came by and the workers left without violent crash I’m used to seeing in Korea back in the late 1980’s.
Don’t forget the 1 child policy with 113 boys to 100 girls birth ratio which itself will bring about social disturbances sooner or later. And workers in China are used to getting double digit increases and often jump the ship for better pay and dormitories. So the era of cheap Chinese labor is coming to an end and commie cadre’s nightmare of young men without jobs and prospect for wives – tinder box!
Here in commodity exporting Canada land it appears people are just beginning to sniff out a problem. Their solution? Continue racking up more debt.
I do have to say that this downturn in the Chinese economy sure makes me wonder who is next to bail out the world as they did in 2009. Then i shake my head and realize nobody is left so its time to prepare for deflation.
Mr. R.
Honestly I wonder how long it will be before we see China getting really serious about dumping on a scale never seen before.
Already in 2010 the EU published a report warning of “possible” dumping due to “excess capacity” in a number of key industries such as steel, glass, solar panels and wind turbines. The Commission responsible must not have passed the warning to the one taking care of antidumping legislation because shortly afterwards a Chinese firm won a massive French contract for a wind power plant (largely funded by the EU) at the Etang de Salses-Leucate by massively undercutting the competition.
Already now China’s steel exports equal Japan’s whole production. In spite of everything, Japan is still the world’s second largest steel producer and Chinese exports so far have taken the way of some of Japan’s traditional customers: South-East Asia, South America etc. As long as Chinese steel doesn’t show up on the European and US markets, the WTO remains unconcerned.
With Chinese exports declining due to, let’s be frank, the same problems we had in 2008 taken to the next level, I expect Beijing to open the floodgates by either reinstating exporter subsidies to pre-2013 levels or devaluing the yuan. Honestly I suspect the Communist Party would like to avoid the latter course of action, both to help local firms service dollar-denominated debt and to avoid inflation flare-ups like we are seeing Europe since Mr Draghi started thrashing the euro with particular gusto or Mr Abe took power in Japan. The Communist Party values social stability over everything else and they know all too well you can cook CPI figures as much as you want but you cannot cook the price of eggs, fresh vegetables and fruit. The Japanese suffer in silence, Europeans grumble on social media, but the Chinese are all too ready to take to the streets and beat on their pans. “Affordable” food is an unwritten rule in China: you cannot send the tanks in if people protest about egg prices.
Now it remains to be seen if China will get serious about artificially propping up her export machine as she is serious about the Shanghai Composite. The big problem is the West seems to be losing its appetite for Chinese export goods: plainly put consumers are so hit by unreported inflation and so leveraged they only buy on credit these days. We have reached a point where car sales boom month after month (though I am starting to be suspicious about those figures) while food purchases continue to lose ground and big box chains keep on laying people off if not shutting down stores.
These are hardly the signs Chinese factories manufacturing toys or cellphone parts would like to read.
Next up is long rumored Chinese RMB devaluation to assist the exporters of finished goods and as you noted commodities of over-built industries like alumium, steel, cars. etc. followed by dumping charges. Protectionist sentiment arises by many nations in tit for tat format leading to trade wars and embargoes.
Oh wait – isn’t this what happened before WW II?
A CNY devaluation will only happen at the Japanese Yen around 150 I’d think. At 200, it would be a full blown currency war. Happy times are coming.
There are a number of problems with erecting trade barriers these days.
First: let’s not beat around the bush: Chinese consumer goods are vital to allow Western consumers to survive two decades of stagnating if not contracting wages. I’ve read an iPhone would cost 30% more than it is were it assembled in North America (most likely meaning Mexico). The same applies to socks, toys, brooms etc. Sure, we can erect trade barriers, but at what cost? Are people ready to further reduce their lifestyles to protect politicallt connected industries a bit more?
Second: I may sound like the usual contrarian at all costs, but trade barriers could spell a catastrophic political crisis in Europe. The reason is Germany.
German exports peaked in 2006-7, recovered somewhat in 2010 but have never been the same. Euro devaluation hasn’t helped exports outside of the EU for the simple reasons Japan has been thrashing the yen even more, China is getting more competitive even in the capital goods department and the pie is shrinking for all parts involved.
Already now there are worries China’s “downturn” (is it a hard or soft landing?) may affect the German export machine more than anybody would like. An export-linked economic crisis in Germany would send Angela Merkel packing (like she well deserves) and open the gates of unknown.
Third: as China’s economic miracles grinds to a halt, the country turns more and more to old fashioned militarism. The People’s Liberation Army (PLA) has always been a formidable force, but in the past decade Beijing used part of those massive trade surpluses to modernize it at breakneck speed. As is always the case in China, official figures are misleading: for example defense budgets don’t take into account the costs of building and maintaining military infrastructures (charged to regional governments) and a good chunk of R&D costs (paid for by the Ministry of Science and Technology).
China’s neighbors are already very uneasy about Chinese military activity. Even if no armed conflict breaks out, tensions in one of the world’s most crowded seaways are bound to break out.
Do we really want to risk pour more gasoline on the fire by erecting trade barriers?
Quantitative Easing With Chinese Characteristics Takes Shape
China’s leaders are increasingly relying on the central bank to help implement government programs aimed at shoring up growth, in an adaptation of the quantitative easing policies executed by counterparts abroad.
Rather than bankroll projects directly, the People’s Bank of China is pumping funds into state lenders known as policy banks to finance government-backed programs. Instead of buying shares to prop up a faltering stock market, it’s aiding a government fund that’s seeking to stabilize prices. And instead of purchasing municipal bonds in the market, it’s accepting such notes as collateral and encouraging banks to buy the debt.
http://www.bloomberg.com/news/articles/2015-08-09/quantitative-easing-with-chinese-characteristics-takes-shape
Now, all of these economic woe caused by corporate overreach and banks gambling in derivatives (and lying about all since 2009). And people have been reaping all the downturn affects as they have grown.
What is next, well governments that have long since given up really representing voters/taxpayers have lined up budgets with bailout clauses to again bail out their indebted banks.
While corporations have deviously set up trade agreements with ISDS investor-state dispute settlement clauses to finish of any foolish ideas, that there is still, the rule of law or Constitutional laws that will protect nation states and their citizens from the greed of multiple lawsuits. Which under ISDS clauses on steroids will move to more or less operate taxpayers like units of ATM’s, all to drain the last vestige of liquidity…
.And done under the smug dishonesty of claiming to protect democracy—sound familiar? See bilaterals.org on global trade agreements–check national budgets for ‘bailout’ clauses….Really taxpayer/citizens should consider any other options….
china is a monolith. it takes a huge effort/amount to move it, or change its left right direction..
Now its economy has decide it wants to go, down.
Subsidizing food prices will stave off a street revolution.
The question is, does the CCP have the finances to force the economy to turn around, or are a lot of junior princelings going to have to stop driving super cars, and start looking for productive work as inflation destroys their grandfathers nest eggs.
As inflation goes hand in hand with the huge amount of liquidity, china will have to pump into the economy, just to keep it going sideways. (Huge as in dwarfing, the amounts pumped in, in the last 5 years, and making the US QE 1 to 3 in total, infinitesimal).
Saudi is depressing the artificially high, price of oil.
Everybody, except the producers, likes that.
When china starts dumping, there will be trouble, as nobody, but stupid consumers, will like it, or allow it, for long.
Steel dumping by china, and the fallout from it, effectively killed the Australian Auto manufacturing industry’s.
A lot of angry people are watching, hard, and very close, impatiently.
It is starting to look like the CCP is intent on turning a defeat into a disaster. Trying to maintain PE ratios over 60 for huge state- owned enterprises that are certainly not the tech next- big- thing is long term impossible.
It’s one thing to burn the furniture but don’t burn the doors.
The SOE’s may end up devouring the real economy.
Exactly right, Nick Kelly, in fact no different that the asinine policies of austerity being forced on ‘people’ by the idiots of the EU or, in our case the idiots of the PC party under their bigger-than-life boob Harper (the one that must be obeyed even if his plans are counter-indicated). In other words, like what has and is happening in Alberta –the only plans of a ‘one-trick pony’—and Harper knows it more than others, that is why he is clinging desperately to ‘terrorism’ and fear-mongering’—
Makes one wonder if his latest ‘throw-a-bone-to-the-centrists’ of allowing thousands of Syrians and (his arch-enemy Iraqis) in as immigrants….maybe he needs them to fodder to set up false accusations—as he appears to do when he is on ’empty’….see The Tyree for a complete breakdown of Harper’s dirty setting ups of his unsuspecting ‘foes’ on ‘the to-get List’ of his.
He really does engender feelings of loathsomeness…..humanity must be some dark indifferent species to him, unless they have something he needs or wants—power and wealth….worth 5 million –interesting?