China - Economic Data & News 01 (May 08 - Oct 08)

[winston]

FEATURE-China furniture makers feel global slowdown pain
By Langi Chiang

WENZHOU, China, July 27 (Reuters) - The furniture factories outside this manufacturing hub are eerily quiet, victims of a housing crisis half a world away in the United States that is sapping demand for everything from beds to bookcases.

Wenzhou is the entrepreneurial heart of Zhejiang, a thriving eastern province that was the country's biggest exporter of furniture in the first five months of the year.

China sells about 40 percent of its furniture output overseas, with half its exports shipped to the United States, according to the China National Furniture Association.

"Business is poor this year, especially since May," said Liu Yongcheng, a senior executive at Zhejiang Adwin Furniture Co Ltd, which is running well below capacity.

When order books are full, the company can churn out $1 million worth of furniture a month.

The difficulties facing Liu and countless other exporters up and down China's coast have grabbed the attention of the leadership in Beijing.

Officials from President Hu Jintao down have carried out a series of high-profile inspection visits, including to Wenzhou, to see for themselves how the still-unfolding global credit crunch is hitting Chinese industry.

Seen from Wenzhou, a major producer of garments, shoes, lighters and even sex-toys, the picture isn't pretty.

Liu's company was the first to move into an industrial estate about 90 minutes outside Wenzhou set up in 2005 to specialise in furniture manufacturing.

Many firms in the cut-throat sector have since come and gone, but Liu said this year's burst of bankruptcies was unprecedented.

Apart from weakening U.S. demand, companies are having to cope with tight credit and reduced tax rebates. Many are shedding staff to survive. Liu says he has reduced his own workforce by one fifth to around 400.

Furniture companies around the globe have faced challenges in recent times.

U.S.-based Stanley Furniture Co Inc posted a surprise second-quarter loss and announced this month it was cutting 350 jobs. Italy's Natuzzi SpA is relaunching itself with a new business plan as it deals with a strong euro, slowdown in North American and Europe, and low-cost competitors.

PROFIT SQUEEZE

Zhu Changling, vice-president of the China National Furniture Association, said U.S. importers were cutting orders as America's housing crisis deepened, while Chinese factories were reluctant to accept the currency risk entailed by long-term orders because of the steadily rising yuan.

Manufacturers are also having to absorb surging input costs, especially high oil and metal prices.

Cheng Zhe, a director at Zhejiang Haozhonghao Health Product Co Ltd, said raw material and labour costs had risen 20 percent and 10 percent respectively so far this year, squeezing the plump 30 percent profit margin the firm used to enjoy.

His firm, which sells a range of orthopaedic chairs, sofas and beds, exports about 80 percent of its production to the United States, the Middle East and neighbouring Asian nations.

"We companies are undertaking bigger risks while our profit margin is shrinking," Cheng grumbled.

The gravity of the sector's ills are hard to judge from official figures.

Furniture exports in the first six months of 2008 were still up 28.5 percent in dollar terms from a year earlier, almost as strong as the 29.3 percent gain in all of 2007.

But a report to the cabinet by the Ministry of Commerce said the average profit margin of firms it surveys fell to only 1.1 percent in the first five months from 3.2 percent in the same period last year, a source told Reuters.

The ministry recommended slowing the yuan's pace of appreciation and increasing rebates of value added tax (VAT) to exporters to prevent a sharp drop in overseas shipments.

STILL OPTIMISTIC

Chinese furniture makers are still very cautious about trying to pass on fast-rising costs to their customers.

"We are in dilemma," said Adwin's Liu. "If we raise prices, our clients will leave. But if we don't, we are going to suffer."

While his firm still hesitates, many others have already increased their prices. Some are losing export orders as a result and are having to focus more on the domestic market.

Hou Xiaojing, a sales executive at Zhejiang Fudebao Furniture Co Ltd, which makes sofas, desks and beds, said one of its big customers had switched business to Vietnam, where prices are lower.

But Wenzhou is nothing if not resilient.

The free-wheeling city is a cradle of capitalism and its traders are often in the vanguard when China carves out new markets in tough parts of the world.

As well as cutting staff, companies are trying to use energy and raw materials more efficiently, and seeking out alternative, lower-cost suppliers.

"We're confident that things will get better in the second half," Liu said, adding he was counting on October's Canton Fair and other trade shows to win fresh orders.

Cheng at Haozhonghao said he believed Beijing would raise VAT rebates for selected exporters and keep a lid on input costs for the rest of the year.

"I think the government is ready to make some policy changes," he said.

Jun Ma, chief China economist at Deutsche Bank in Hong Kong, expects Beijing to increase VAT rebates by 2 percentage points on textiles and by 4 percentage points on apparel in coming weeks.

"This policy should help improve profit margin of the beneficiaries by 1-2 percent," he said in a note to clients.

[winston]

'Relatively fast' growth sought despite inflation threat

The central bank said it will seek to create conditions for "relatively fast" economic growth in the coming months, despite the ongoing threat of inflation.

"We will use various monetary policy tools to create good conditions for stable, relatively fast growth,'' the People's Bank of China said, outlining decisions made at its second-quarter policy meeting.

The bank's statement came after figures suggested growth in the economy - the world's fourth-largest - is beginning to slow. The bank, however, warned that "the upward pressure on prices is clear.'' The consumer price index rose 7.9 percent in the first half.

The bank reiterated its pledge to improve its managed foreign exchange regime and increase the flexibility of the yuan exchange rate.

AGENCE FRANCE-PRESSE

[winston]

QFII, QDII schemes to be expanded

Beijing will expand its cross-border equity investment programs to improve the management of foreign exchange reserves and broaden financial products, the People's Bank of China said.

The central bank will expand the scope for qualified foreign institutional investors, or QFIIs, to buy Chinese equities. Qualified domestic institutional investors, or QDIIs, will be allowed to invest more money overseas, the central bank said.

The bank also wants to develop the country's debt market. Foreign companies will be allowed to sell more yuan-denominated bonds in China, while mainland companies can sell bonds in Hong Kong, it said.

The monetary authority plans to study the possibility of allowing overseas-listed companies to issue foreign-currency bonds in the domestic market.

BLOOMBERG

[winston]

The middle class in the Middle Kingdom
Ronald Chan
Monday, July 21, 2008

As the stock market continues to decline, I think of myself at war against an unknown army.

Whether bulls who panic or bears who sell short, their invisible hands constantly attack my positions, pressing me to surrender. Even worse, they attempt to destroy my faith in the Chinese economy.

When uncertainty is high and sentiment is poor, it is difficult to tell where we stand. However, in these bleak hours we can focus on long-term figures to remain optimistic.

Indeed, the bull case for China remains intact and the country might still be in its early stage of economic growth. Consider the rise of the middle class, which is often the main fuel of growth for an economy.

The lower middle class in China is defined as earning from 25,001 yuan (HK$28,620) to 40,000 yuan per annum and the upper middle class earns from 40,001 yuan to 100,000 yuan annually.

Approximately 25-30 million people are expected to swell these ranks every year for the next 20 years.

If this projection is correct, we will see the first wave of domestic consumption peak in China by 2011-2014, by which time the country will boast a middle class of approximately 270-300 million.

The second phase of growth will kick in after 2015, when the lower middle class shifts to upper middle class status, commanding 4.8 trillion yuan worth of disposable income.

Finally, by 2025 China will have a middle class of 520-550 million individuals more than 50 percent of the expected urban population with 13.3 trillion yuan to spend.

Another economic driver will be urbanization. An expected 18 million people per annum will move from rural to urban areas in China over the next 20 years.

That is similar to building 1 Shanghai every year or 1 Singapore every 3 months, and promises the same economic benefit.

( Winston's comment: Dont agree that the urbanization trend will continue forever. With better technology, people can work from home away from the cities, as in Europe and the US )

Domestic consumption will drive the Chinese economy to the next level.

Although many issues will remain in the short term (high inflation, oil prices, and the economic turmoil in the US), it is in the long haul that one should stick with Chinese stocks.

With H-shares still gloomy, it might seem that we are losing a few battles. However, it is winning the war that matters.

Let us borrow Sir Winston Churchill's observation of changing fortunes during the Second World War and apply it to China.

Now, this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

[winston]

China says to expand insurers' investment options

BEIJING, July 29 (Reuters) - China plans to give insurance firms more investment options, the industry watchdog said on Tuesday, as it disclosed that insurers still hold nearly 80 percent of their assets in bonds and bank deposits.

Beijing has been cautiously allowing insurers to diversify their portfolios, launching a pilot programme to let them invest in infrastructure projects and letting them buy overseas equities.

"We will steadily expand the investment channels and issue policies at an appropriate time to widen the pilot programme of infrastructure investment and overseas investment," Yuan Li, spokesman for the China Insurance Regulatory Commission (CIRC), told a news conference. He did not elaborate.

Regulatory and industry sources told Reuters earlier this month that authorities may allow some insurers to invest up to 8 percent of their assets in infrastructure projects so they can diversify out of shares and bonds.

Insurers had 10.7 percent of their assets in equities and 53.6 percent in bonds at the end of June, the regulator said.

At the end of 2007, the proportions were 17.7 percent and 44.0 percent respectively. The Shanghai stock market .SSEC fell about 48 percent in the first half of the year, dragging down the share of equities.

Providing a breakdown of the main investment categories, the agency said bank deposits accounted for 25.8 percent of insurers' assets at the end of June, up from 24.4 percent at the end of 2007. The share of mutual funds fell to 6.9 percent, from 9.5 percent.

Beijing also plans to allow banks to invest in insurance firms, as part of an initiative to gradually break down firewalls among financial sectors as the industries mature.

[winston]

Beijing to tighten approval requirements for overseas projects

China will fine companies up to 1 million yuan (HK$1.14 million) if they undertake contracts abroad without government approval, under new rules aimed at improving the quality of overseas projects.

The regulation, which takes effect September 1, requires companies to have had no major accidents or quality problems in the past two years and no breach of contract or business laws in the past three years in order to win approval. All workers going overseas must have valid labor contracts.

Companies may be banned from overseas work for up to five years for violations and for failing to take corrective action when violations are discovered. In the first half, new overseas contracts for Chinese firms hit US$46.8 billion (HK$365.04 billion) , up 50 percent year on year.

BLOOMBERG

[winston]

Top mainland power firms may have lost 7b yuan

Four of China's five major power generating groups may have lost a total of 7 billion yuan (HK8 billion) in the first half, state media reported, as they were squeezed by soaring coal costs and state caps on power rates.

China Guodian Corp have lost 1.4 billion yuan. China Datang, parent of Datang International Power Generation (0991), suffered a loss of 1.5 billion in the first five months.

China Huadian Corp, parent of Huadian Power (1071), lost 2.65 billion yuan in the first half.
Only China Huaneng Group, parent of Huaneng Power International (0902), earned a small profit, the Shanghai Securities News said, citing the industry official.

REUTERS

[winston]

China's stock market still healthy -regulator

BEIJING, July 30 (Reuters) - China's stock market is still healthy despite plunging share prices this year, the country's top securities regulator said in a statement on Wednesday.

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said the commission would try its best to ensure stock market stability in the second half of the year.

The benchmark Shanghai Composite Index .SSEC has lost over half its value since its peak in October 2007, making it one of the worst-performing stock markets in the world this year.

But Shang said the bear market should be short-lived.

"The fundamentals for a healthy stock market have not changed significantly, and China's macroeconomic foundation will continue to support the healthy development of capital markets," Shang said in comments published on CSRC web site on Wednesday.

[winston]

Market sees mainland tax changes soon
Staffreporter
Thursday, July 31, 2008

The National Development and Reform Committee's regular report published Tuesday has bolstered a belief in the market that any fiscal policy changes in taxation and power tariffs will be implemented soon, a mainland newspaper reported.

"Reform in resources tax, value- added tax and personal tax will be the reform focus and will be pretty soon," the China Business News cited mainland sources as saying.

It has been rumored in China that the authorities will hike the resources tax, affecting coal and the power industry, expand value-added tax nationwide, and implement personal tax as soon as next year.

On Tuesday in its half-yearly report, China's top planner listed nine tasks of economic reform. These included to increase exchange-rate flexibility, deepen the yuan exchange-rate mechanism, improve cross-border capital flow monitoring, improve the fuel and natural gas price mechanism, and expand the domestic forex bond market.

However, sources at the taxation bureau told the Shanghai business newspaper that the chances of tax policy changes, especially in value-added tax, were now pretty high, in light of recent half-year macroeconomic data.

China has a pilot scheme in 26 cities of the Northeast region, expanding value-added tax from just the production sector to also include the consumer sector. The source said that budgetary departments are now recruiting feedback from those pilot cities about the new scheme.

[millionairemind]

Published July 31, 2008
'Made in China' economies an illusion for some companies
They fail to take account of the total cost of business there, including training, time delays, production monitoring and quality control
By SYLVIA WESTALL

WAFTS of golden fluff whirl in the air as Irene Basan wedges a bundle of material onto a spike and gently turns it inside-out, right ear, left ear, then a snout, to reveal a Steiff teddy bear head.

Home ground preferred: Germany is becoming increasingly attractive as a production centre, for companies which are not driven by cost savings alone

She has been hand-making Steiff toys for 18 years in Giengen, the tiny south German town where the maker of collectible teddy bears - some worth hundreds of thousands of euros - was founded over 125 years ago. Chasing lower costs, Steiff outsourced around a fifth of its production to China in 2003 but has now decided to come back because of concerns about quality and staff turnover.

Steiff is one of a small number of German firms which are swimming against the tide and leaving China, despite its cheaper workforce and a burgeoning consumer population. With fuel at record highs, some cite mounting transport costs.

Production of Steiff toys, which include a distinctive long-limbed bear with a melancholy growl, will come back to Germany and other countries in Europe by the end of 2009.

'A Steiff animal has to look cute, it has to look at you and say, 'take me in your arms and hug me, I'm here for you, I'm your friend',' Steiff managing director Martin Frechen told Reuters recently. 'If the symmetry is off and if it looks like it's been run over by a car, it's not what we want. People don't pay for that.'

Consisting of around 35 parts and with an average price of 40-70 euros (S$86-150), the toys take up to a year to learn to make and around 80 per cent of the work is done by hand.

But with twisted legs, bald patches and open seams, a 'cumbersome' number of the Steiff toys made in China had to be rejected, Mr Frechen said, because high staff turnover in a fast-growing economy meant workers did not have long enough to train.

'We don't really fit in over there,' he said, pointing out that Steiff's typical orders of around 500 lots were also too small to reap good cost savings in factories more accustomed to mass production.

Germany has been the world's largest exporter of goods since 2003, but China has been snapping at its heels for the top spot - even though Chinese manufacturing was cast in a poor light last year after US toymaker Mattel had to recall over 20 million Chinese-made toys, costing it around US$110 million.

The world's leading toymaker, which produces over half its products in China, has since stood by its Chinese partners and ramped up quality checks. But for smaller companies, such quality control is difficult to implement, said Harald Kayser, head of the China Business Group at auditors PricewaterhouseCoopers (PwC).

'If you don't have people from your own head office in China, then it is very difficult to manage the process,' he said. 'Smaller companies have more problems in this area.'

A PwC study shows that companies can save up to 50 per cent making their goods in China instead of Germany, but that firms often underestimate logistics costs.

Around a third of companies actually incurred losses by moving production east, the study showed. German trampoline maker Bellicon, with an annual turnover of 2 million euros, also says it regretted moving some production to China and has now brought it home.

'We had to do so much extra follow-up work in Germany, such as dealing with customer returns, that when we calculated it, we had barely saved anything,' said manager Heiko Schmauck. He said the company had frequently visited its Chinese partner to try to build up a good relationship. However, once during a six-month gap between visits, almost the entire workforce at one factory had changed.

'It was no surprise the quality varied so much. New people came, the quality dropped, then they improved their skills and left,' he said, adding that the Chinese-made trampoline parts did not reach high enough endurance standards.

Companies fail to take account of total cost of business in China, including training, time delays and monitoring of production systems, said Paul Midler, president of business consultants China Advantage.

'For every foreign company that is honest with itself and admits that manufacturing in China comes with a higher cost, there are countless others that will fool themselves into thinking that they can manage it with fewer resources than it actually requires,' he said.

He said Chinese manufacturing has advantages such as speed and the 'clustering phenomenon', where companies at all stages of the supply chain are based together, giving ready access to a network of sub-suppliers. But some companies say higher shipping and fuel costs mean producing goods in China no longer makes good business sense.

Global oil prices have doubled in the past year: a study by Jeff Rubin and Benjamin Tal of CIBC World Markets found that over the last three years, every US$1 rise in world oil prices has fed directly into a one per cent rise in transport costs.

German automation company Hirschmann said in a statement that it moved back production of some its electrical components to Germany from China to cut down on the distance its goods travel, but added that China still remains an important consumer market.

A study by the German engineers' association (VDI) shows one in five German firms returns to Germany after a brief foray abroad. 'This figure shows us that the 'Made in Germany' label remains a mark of quality,' VDI president Bruno Braun said in a statement.

Analysts have queried the VDI figures and say there is little evidence to suggest companies are quitting China or other emerging market countries en masse for Germany.

The German Chambers of Industry and Commerce (DIHK), which surveyed 8,000 German firms, says only around 3-5 per cent of companies come back to Germany each year and around a third have ambitions to grow in China. 'It is absolutely normal that some companies fail,' said DIHK chief economist Volker Treier.

Given a lack of resources for proper research, companies sometimes have to 'jump into cold water' and see if they can swim, he said. 'For a small company with an emphasis on very high quality, it is very difficult.' He pointed to successes in the automotive sector, where production has been switched to China from Germany, allowing carmakers also to make inroads into China's home market of 1.3 billion potential consumers.

But he added there could be some evidence that Germany is becoming increasingly attractive as a production centre, for companies which are not driven by cost savings alone. From 2003-2007, the importance awarded to production cost savings by German companies in DIHK surveys fell. 'But we have to wait and see whether this 'new love' endures,' Mr Treier said. -- Reuters