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China factories crippled by curbs on credit

Posted to Far East Maritime (by on July 21, 2011

The bad news continues for factories in China with some big mainland players being pushed off a cliff.

Access to credit is critical to sustaining a manufacturing business in China, especially at the lower value, mass-producing end of the market.

The orders for export goods can be measured in millions of units that require huge quantities of raw materials. A certain amount of the more commonly used materials will be kept in stock on the premises, but the vast amount will have to be purchased from suppliers as and when required.

With profit margins of around three percent, tying up capital in surplus inventory would be wasteful. Raw materials are acquired only after order contracts have been signed.

Beijing placed curbs on lending last year in an attempt to rein in fast rising inflation, and while this has worked to some extent it has put the squeeze on the small and medium manufacturers that need credit to survive. Thousands have gone out of business in the last two years.

Two large factories in Dongguan, the manufacturing heartland of Guangdong Privince just outside Shenzhen, went bankrupt last week, with the inability to secure financing cited as one of the reasons.

Dongguan Soyea Toys was one of the oldest toy factories in Dongguan, according to the South China Morning Post. It had weathered many economic downturns but could not withstand the onslaught of credit tightening, falling orders and rising costs of labour and raw materials. The only way out was down and the factory shut its doors.

Textile firm Dingjia also went under and put 2,000 workers on the street.

Various estimates have Pearl River Delta manufacturing orders down 15 percent on last year. Most of the orders are from overseas with domestic demand continuing, albeit at a slower pace.

Costs are up more than 11 percent. For manufacturers using plastic in their goods, the high oil price has driven up costs of raw materials, and the constantly rising minimum wage doesn’t make things cheaper. Since March, the minimum wage has risen by 18.6 percent, but there is also a shortage of labour in Guangdong and many factories are paying well over the minimum just to attract and keep workers.

Throw in a record high RMB exchange rate against the US dollar and many factories have been left with just enough room to turn around and fall over the edge.

That gloomy outlook we forecast last week looks to be with us for an extended period.

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