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Chinese firms tightening belts

By Wang Lan (China Daily)
Updated: 2008-10-14 09:16

The worsening US credit crisis that is threatening to grow into a global recession is reportedly forcing many CEOs of Chinese enterprises, for years geared toward an export boom, to sharpen their plans for cutting production and corporate spending to prepare for leaner times.

Without a large enough domestic market to cushion the projected fall in exports, many Chinese enterprises are said to be facing a problem of excess capacity, built largely on easy and cheap credit in the past several years.

The problem is particularly prominent in the steel and heavy industry sectors, the main engines of export growth, economists and industry analysts have said.

With heavy industrial investment over the past several years, the production capacity in a number of sectors has grown much faster than domestic demand. Since then, the country has begun exporting its surplus capacity abroad.

Since the turning point in China's external trade in 2003, when its total exports exceeded imports for the first time, the rising trade surplus has mainly stemmed from one or two specific sectors, rather than from a swathe of industries. These have included heavy industrial equipment and steel.

For instance, steel exports accounted for 25 percent of the country's total exports in the past several years. In anticipation of slowing global demand, major steel manufacturers had earlier said they would cut output by 20 percent.

Customs' statistics showed the growth rate of China's accumulated export to the United States from January to July dropped 8.1 percentage points to 9.9 percent, the first single-digit growth since 2002.

It is estimated that China's overall exports will drop 4.75 percentage points for every point of decline in US GDP, whose growth is largely fired by domestic consumption.

Light industries such as garments and toys have been hit equally hard by falling exports. But these are said to be mainly labor-intensive manufacturing industries that involve little long-term capital investment. Their adjustments to falling demand will simply call for shortening working hours and a reduction in shifts.

Even then, thousands of small and medium-sized manufacturing enterprises in Pearl River Delta region have reportedly closed down.

Latest official figures showed that China's export growth fell to 21 percent year-on-year in August, from 26.9 percent in July. Meanwhile, industrial production growth declined to 12.8 percent year-on-year in August from 14.7 percent in July and 16 percent in June.

"Chinese exports are sensitive to weaker demand in industrialized countries in general, and the US in particular," said Zhao Xinge, a professor at China Europe International Business School. The US and European Union account for about 40 percent of China's total exports.

To be sure, the government has taken measures to lessen the impact of the worsening US financial crisis on China's economy. "We expect China's government to continue loosening monetary policy and draw on its fiscal resources to bolster investments in infrastructure," said Jing Ulrich, managing director and chairwoman of China Equities at JPMorgan.

But the effect of government measures will take months, if not years, to come through, while the problem arising from overcapacity in some major industrial sectors are immediate.

Zhang Ping, a senior steel industry analyst at Umetals, a leading domestic metal consultancy, said: "The investment in the steel industry since 2003 has seen sharp and persistent increase, despite some interruptions within that period due to the government macro policy change to dampen overinvestment."