Fears Of Unrest Prompt Bailout Of China Exporters

The first of a three-part series.

Factory floor in Dongguang i i

Workers cut wooden toy parts in a factory in Dongguan in 2002. Many foreign entrepreneurs have set up factories in the region. Peter Parks/Getty Images hide caption

itoggle caption Peter Parks/Getty Images
Factory floor in Dongguang

Workers cut wooden toy parts in a factory in Dongguan in 2002. Many foreign entrepreneurs have set up factories in the region.

Peter Parks/Getty Images
Workers at a bicycle factory in Shenzhen i i

A worker at the Dahon bicycle factory in Shenzhen punches spoke holes in tire rims. As labor and material costs have risen, Dahon's proprietary technology has allowed the company to charge higher prices for their folding bicycles. Anthony Kuhn/NPR hide caption

itoggle caption Anthony Kuhn/NPR
Workers at a bicycle factory in Shenzhen

A worker at the Dahon bicycle factory in Shenzhen punches spoke holes in tire rims. As labor and material costs have risen, Dahon's proprietary technology has allowed the company to charge higher prices for their folding bicycles.

Anthony Kuhn/NPR

Over the past quarter century, one trade relationship has been central to the process of economic globalization — Chinese factories exporting products, and American consumers buying them.

The current economic crisis signals a change in that relationship, and the gradual decline in China's role as factory to the world.

China has tried to decrease its reliance on export industries and, for now, the country has resorted to propping up its export sector out of fear that its collapse could lead to unemployment and social unrest.

Pressure On Chinese Factories

Many of the dress shoes and sneakers that end up on sale at Sears and Family Dollar begin their journey halfway around the world under the sewing machines of the Feng Tai Footwear Company, located in Dongguan city in the southern Guangdong Province's Pearl River Delta.

Eddie Lam, Feng Tai's CEO, says this is one of the toughest times he's seen since he moved his factory here from Hong Kong nearly 30 years ago.

With prospects for the Christmas shopping season looking grim, Lam says American retailers are delaying shipments of shoes they ordered from him months in advance.

"All of a sudden they call us and say, hey, they want to split those shipments into three shipments instead of one big shipment," Lam says. "And then six months down the road they only take half of it, and you're stuck with them."

That makes it hard for Lam to pay his suppliers. He has stopped replacing workers who quit, and he's had to consolidate his assembly lines.

Worries About Bankruptcy

Most of the factories in the delta simply assemble materials into finished products for export. They're known as original equipment manufacturers, or OEMs. Hong Kong toy company executive Ben Hui says the technology, brand names and marketing are all in the hands of the foreign companies for which they produce.

"OEMs have nothing to upgrade. We just add labor," Hui says. "There are only two things we can do — maintain efficiency and quality. If you can do that, you can survive. Lose either one, and you're finished."

Official statistics show that thousands of factories in Guangdong province have gone bankrupt this year. In the latest flare-up of unrest, laid off toy factory workers protested in Dongguan on Nov. 25, flipping police cars and smashing company offices.

This has Beijing worried. It has decided to protect exports by increasing export tax rebates and halting the three-year-long appreciation of China's currency against the dollar. And local governments in the delta have used billions of dollars to bail out small and medium enterprises.

China's top economic planner, National Development and Reform Commission Director Zhang Ping, defended the bailouts at a recent press conference.

"Helping these companies get through their current difficulties is entirely necessary and appropriate," Zhang said. "Otherwise, if too many factories go bankrupt, it will lead to many workers losing their jobs, and could increase social tensions and unrest."

Righting The Imbalance

One bright spot in the Pearl River Delta is that most American companies there are surviving. At the Dahon bicycle factory, workers make tire rims for the company's folding bikes. The bikes' patented technology is a hit with consumers who want to save energy and storage space. The company's founder, David Hon, says he anticipated the economic changes now under way.

"Three or four years ago, when we saw the thing coming, the groundswell of everything coming, we started to do domestic marketing and sales of our product," Hon says. "And that took a couple of years, and finally took off a couple of years ago."

The problem is that now neither American nor Chinese consumers have the appetite to buy all the products the delta produces. China's industrial oversupply and America's overconsumption have become the main factors in a major global imbalance that is now undergoing a correction.

Beijing University finance professor Michael Pettis says that the most likely way out of this imbalance is that U.S. household savings must go up, and Chinese production must come down.

"There's two ways production [can] come down. One way is the way it happened to America in the 1930s, where basically American overproduction collapsed," Pettis says. "We could have that in China — China overproduction could collapse. China may try to protect it, by exporting more, but my fear is that that creates a trade war, in which case it will have to come back to China."

Pettis points out that 80 years ago, the tables were turned — it was the U.S. that was exporting its oversupply of goods to Europe. And its efforts to protect those exports, such as the Smoot-Hawley Tariff Act of 1930, led to a bruising trade war, falling foreign trade and an even harder economic landing.

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