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RENEE MONTAGNE, host:

Chances are excellent that if you went shopping this weekend you brought something home named "Made in China." It was only 30 years ago this month that China changed course moving from a state-run economy to a market economy. Factories started springing up across southern China's Pearl River Delta. Those factories have been producing the goods Americans have been buying. That relationship has been at the heart of economic globalization. Now the global economic downturn has hit China too. This week NPR's Anthony Kuhn takes us to the place where China's economic boom began and looks at how it's coping.

ANTHONY KUHN: 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. It's located in Dongguan city in southern Guangdong Province's Pearl River Delta. Eddie Lam is Feng Tai's CEO. He says that this is one of the toughest times he's seen since he moved his factory here from Hong Kong nearly 30 years ago. Companies here have already taken a pounding this year because of rising costs for labor and materials and a weaker U.S. dollar. 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.

Mr. EDDIE LAM (CEO, Feng Tai Footwear Company): All of a sudden they call us and say, hey, we want to split those shipments into three shipments, instead of one big shipment. Then six months down the road they only take half of it, and you're stuck with it.

KUHN: That makes it hard for Lam to pay his suppliers. Lam has stopped replacing workers who quit, and he's had to consolidate his assembly lines. 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 Benjamin Hui explains that the technology, brand names, and marketing are all in the hands of the foreign companies for which they produce.

Mr. BENJAMIN HUI (Chinese Toy Company Executive): (Through Translator) OEMs have nothing to upgrade. We just add labor. There are only two things we can do: maintain efficiency and maintain quality. If you can do that, you can survive. Lose either one, and you're finished.

KUHN: 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 November 25, flipping police cars and smashing company offices. This has Beijing worried. It's decided to protect exports by increasing export tax rebates and halting the three-year-long appreciation of China's currency against the dollar. 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.

Mr. ZHANG PING (Director, National Development and Reform Commission): (Chinese spoken)

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

One bright spot in the Pearl River Delta is that most of the American companies here are surviving. At the Dahon bicycle factory, workers are making 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, Dr. David Hon, says he anticipated the economic changes now under way.

Dr. DAVID HON (Founder, Dahon Bicycle Factory): 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 a product. And that took, you know, a couple of years, and finally it took off a couple of years ago.

KUHN: 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 only now undergoing a correction. Beijing University visiting finance professor Michael Pettis says that the most likely way out of this imbalance is that U.S. household savings must go up and that Chinese production must come down.

Professor MICHAEL PETTIS (Finance, Beijing University): Now 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. 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.

KUHN: 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 economic trade, and an even harder economic landing. Anthony Kuhn, NPR News, Guangzhou, China.

MONTAGNE: Tomorrow we continue our series with a look at the challenges China faces in building a modern industrial workforce.

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