Chinese manufacturing industry still in trouble
- By Zhang Ming'ai
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China.org.cn, July 27, 2011
According to the purchasing managers' index released by HSBC bank in July, Chinese manufacturing activity has been declining this year and is likely to decline further in the third quarter.
Undoubtedly, the Chinese manufacture industry is now facing its biggest challenge since the financial crisis in 2008. But this time the hard-hit area is along the east coast, including provinces such as Guangdong, Zhejiang, Jiangsu and Fujian.
Small and medium sized manufacturing firms in these provinces are mostly labor-intensive and low value-added subcontracting firms.
But what factors have caused the difficulties for China's manufacturing industry?
In an interview, Luo Jun, CEO of Asian Manufacturing Association, said the current situation facing Chinese manufacturing sector is very much like that in 2008. Both were a result of capital problems.
The financial crisis dampened the U.S. and European markets and subsequently reduced demand for Chinese products.
This time the crisis facing the manufacturing sector can be explained by four factors.
First, China has taken a series of measures to regulate overheated industries such as real estate. Over the first half of the year, the central bank has raised benchmark interest rates two times and the reserve requirement ratio six times.
Currently manufacturers find it hard to get loans from the financial institutions or they can only get loans at higher costs. To get loans from formal institutions, firms have to pay interest rates 4 or 5 times higher than what they paid before the interest rate hike and to get loans from other channels they have to pay interest rates 10 to 20 times higher than the bank interest rates.
But the profit margin of the manufacturing industry is very small, making it hard for factories to withstand higher borrowing costs.
Second, transformation and upgrading have pushed some small and medium manufacturing firms into crisis. Some tried to transform their firms. But usually they stopped their efforts when faced with enormous investment requirements.
Rises in raw material prices and labor costs have also squeezed the manufacturers' profit margins. The prices of raw materials have risen continuously over the past few years. And workers have been asking for more wages.
In order to protect the rights of workers, many local governments have forced firms to guarantee minimum wage increases each year and buy insurance for their employees. But their prices have not risen to account for these higher costs.
Finally, many manufacturers have invested in the real estate sector, hoping to turn a quick buck. But since the housing market has been sluggish due to tightened government regulations, these efforts have dragged manufacturers further into crisis.
Luo said that while cooling the overheated real estate sector is important, the credit policy should also take the development of the manufacturing industry into consideration.
Manufacturing firms should also strengthen their ability to innovate and place a higher priority on science and technology, said Luo. Science and technology is the only magic formula that will help the manufacturing firms remain successful.
Luo predicted that Chinese manufacturing firms are likely to face new opportunities in the fourth quarter.
A number of favorable policies will be introduced, and some firms will surely benefit from those policies.
And overheated industries such as real estate are likely to cool down in the third quarter, so the government may adjust macroeconomic policy and make financing easier to come by.
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