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Tue 13 Dec 2011 03:01 PM

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China workshops fighting for survival

Profits plunge amid broad downturn and experts warn of more misery seen ahead

China workshops fighting for survival
Chinese workers go about their chores at a textile factory in Huaibei, in east Chinas Anhui province

A broad and bruising downturn is sweeping through China's
giant manufacturing sector, ensnaring thousands of factories already fighting
for survival in the face of plunging profit margins.

While the misery has not yet reached levels seen in 2008
when global financial turmoil caused trade to seize up, Chinese exporters
across industries are battling hard times as Europe's crisis and tight credit
conditions at home pummel sales.

The tough times are clear from China's trade data released
this weekend, which showed exports growth in November at its most sluggish in
two years. Sales to Europe, China's biggest market, rose in single digits for
the third straight month, a sharp slowdown considering growth averaged more
than 18 percent in the first eight months of 2011.

"I expect next year to be even worse," said Danny
Lau, chairman of Hong Kong's Small and Medium Enterprises Association, whose
members include China factory owners. He said factories already report a 15
percent annual drop in orders.

"It's like the whole of Europe has no water, no money.
If this continues, it will be extremely troublesome for us."

Most think the worst can be avoided if Europe survives its
troubles, but the stakes are nonetheless high: millions of factory jobs are on
the line and retrenchment would bring unwanted social instability to China
ahead of a once-a-decade transition of China's top leadership due late next

Already, a wave of industrial disputes has hit factories
around the country, from the manufacturing heartland Pearl River Delta in
southern Guangdong province to the Yangtze river Delta near the country's
financial capital Shanghai in the east.

Beijing is not taking any chances. It signalled a shift in
monetary policy in November by cutting for the first time in three years the
amount of cash banks have to keep in reserve to soothe a local credit crunch
mostly punishing smaller firms.

It is not clear if the policy turnaround can stem factory
closures in China, the world's top exporter in 2010, but Lau is not hopeful.
Twelve other company officials Reuters spoke to from sectors ranging from steel
to textile were also not optimistic.

China may use a downswing to push manufacturers up the value
chain by letting labour-intensive factories shut to make way for more
capital-intensive ones, Lau said.

"Officials tell you they won't sacrifice us, but in
reality they are sacrificing us," he said. "There's nothing we can

On the ground, few businesses appear immune to a swooning
economy - even those that rely on domestic demand - thanks to massive increases
in the price of raw materials and the inability of firms to pass them onto
price-savvy consumers.

Price increases among China's raw materials suppliers have
averaged 9.7 percent over the last nine months. Consumer goods makers have had
to absorb more than half of that, managing an average price increase of just
4.4 percent in the same period.

As was the case in 2008, manufacturers high up the supply
chain such as raw material producers, were first to feel the headwinds of
cooling demand.

"Our orders for December will fall 10 to 15 percent
from November as customers' demand has shrunk," said an official at
China's Maanshan Iron & Steel, one of China's largest state-owned

"We are trying to accept small bookings, such as even a
50-tonne deal in an effort to retain the market, but this also leads to higher

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In better times, large Chinese steel mills typically take
bookings of at least a few thousand tonnes.

The gloom percolates down the supply chain. Taiyuan Heavy Co,
which sells machines to Chinese factories including steel makers, said demand
is flat because its customers are struggling.

With businesses suffering, workers are shopping less, and
firms from textile mills to car makers feel the squeeze., China's biggest e-commerce firm that sells
everything from doors to sweets, had its worst quarter in almost two years from
July to September. It expects Chinese consumption to take "considerable
time" to rebound.

Textile makers are also worried.

"We are not optimistic about next year," said Chen
Shiwei at Jiangsu Miaotong Textile Co. Ltd, a textile mill in China's eastern
province of Jiangsu. "Production will definitely slow."

Chinese cotton prices already betray the strain, down 40
percent from February's record peaks.

To be sure, the downtrend is not hitting all firms evenly.

Those favoured by Beijing in subsidised,
"strategic" sectors such as green technology have a buffer from
economic anxieties, said Keith Olson, director at Environmental Investment
Services Asia, a regional fund focused on environment and clean energy.

Luxury consumption is another bright spot.

Diamond seller Pluczenik Group reckons that China's growing
rich make diamonds "a necessity, not a luxury purchase".

"Diamonds aren't like televisions or refrigerators. The
demand is fuelled mainly from weddings," said Pluczenik's Chief Executive
Tzvi Pluczenik.

Shipping firms are wincing from slowing trade. Maersk Line,
the world's top container shipping firm, expects to be in the red this year.

In some ways, the latest wobble in China's economy resembles
that in 2008-09, said Rob Subbaraman, chief Asia economist at Nomura in Hong
Kong. First exports slow, then firms cut investment, and finally consumers trim

But there are also worrisome differences: major economies
have little room to cut interest rates; weak global demand is aggravated by
China's tight credit conditions; and Beijing is less prone to big-bang stimulus
compared to three years ago.

This means China cannot count on a repeat of 2009 when
exports surged on global monetary and fiscal stimulus and spurred an economic
recovery, Subbaraman said. Instead, Chinese consumers need to pull their weight
and bolster China's economy.

Yet with shoppers elsewhere staying at home, it would be
hard to coax typically thrifty Chinese to spend their way into growth. And not
all factories can afford the time.

"A lot of factories have gone bankrupt," said Liu
Shengqiang, manager of Chiyuan Clothing Factory in Guangzhou.

"My customers in Denmark say one-third of the clothing
stores there are closing, so they're not buying. It's the same in the
Netherlands and Spain and Italy, and the credit situation is even worse."

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