Asia Times

BEIJING - China's decision on Tuesday to raise export tax rebates on toys, garments and more than 3,000 other products to help the labor-intensive export-oriented manufacturing industries mitigate the impact of the global economic slowdown, came after several several Hong Kong-invested factories fell victim to shrinking United States and European Union markets.

The failure of factories in Guangdong's Pearl River Delta area, such as two run by toymaker Hong Kong-listed Smart Union Group, has thrown thousands of workers out of work. Many have taken to the streets demanding their unpaid wages.

The Ministry of Finance said that from November 1, the rebate for toys would be raised to 14% from 11% and that for garments to 14% from 13%. In all, 3,486 items - about one quarter of the country's exports - will be covered.

The tax changes will be welcomed by exporters under increasing pressure from soaring production costs, revaluation of the Chinese currency and falling demand from China's two major export destinations - the US and Europe.

Analysts, while saying tax incentives could help boost exporters' confidence, cautioned that the new policy may not have an immediate effect as the global economic outlook remains gloomy. The rebates may also not be enough to offset rising raw material and labor costs.

The impact of the downturn so far was evident at the biannual China Import and Export Fair, or Canton Fair, an important barometer of China's international trade. Trade volume at the October 15-19 first phase of the autumn session of the 104th fair in Guangzhou (formerly known as Canton) dropped by about 10% year-on-year.

The fair chalked up a total trade volume of US$16.45 billion, down 10.8% over the previous year, said fair spokesman Mu Xinhai on Monday. Orders for home appliances and electronics, which were featured in the first session, posted marginal increases, but trade in hardware, tools, machinery, vehicles and spare parts, declined.
Orders from the United States posted the biggest drop, falling by about one third of last year's volume to $1.63 billion. There were about a third fewer buyers from Europe and the United States this year, Mu said.

The pace of expansion in China's exports dropped by 4.8 percentage points in the first three quarters from last year, growing by 22.3% to a total of $1.07 trillion, according to data released on Monday.

Stephen Green, head of China research at Standard Chartered, told Bloomberg that export growth could tumble to "zero or even negative growth" in 2009.

Faced with dwindling foreign orders amid global economic slowdown, Chinese exporters at the trade fair such as Jiangsu Hotwind Sauna Equipment are trying to divert their attention to domestic markets.

Hotwind chairman Qiao Guan said the company's sales in the United States, which accounted for about 30% of its total exports, had dropped by more than 20% this year.

Research shows "some exported goods are affordable and have good sales prospects in the local market", he said.

Himin Solar Energy Group, based in eastern Shandong province, has also been losing orders for its solar water heaters as some Western countries cancel subsidies on environment-friendly imports, according to Xue Xinwen, head of the firm's international trade department.

"We have sent more staff to market our products to local [Chinese] infrastructure authorities and companies," he said. "Domestic consumption has been greatly boosted by a robustly growing economy, creating positive situations for exporters to go local."

Even so, the readjustment can be difficult for some companies. Li Jianlan, a worker with Wanji Plumbing Materials Co Ltd, based in Ningbo, in the east-coast province of Zhejiang, said an exclusive exporter such as her company lacked channels and brand loyalty in the domestic market. "These are two different kinds of markets, and it takes a lot of work to be familiar with the ways business is done with local buyers," she said.

Huang Yan, general manager of the L-bright Export Manufacture Corporation, said it had been very difficult to sell its products to domestic buyers as they lacked a price advantage.

Declining overseas demand, rising raw material costs and falling home prices have helped drag China's gross domestic product (GDP) growth down to 9% in the third quarter, the slowest rate in five years, raising concern among observers who hoped the country's rapid expansion would compensate for falling demand elsewhere.

The head of China's top economic planning agency pledged that it could maintain its growth rate. "Of course, due to the upturn of economic turbulence outside China there is some slowdown to our growth rate, but I think the growth of China's economy will still be at a 9% rate," Zhang Ping, chairman of the National Development and Reform Commission, told reporters in Australia.

He cited strong domestic demand, adding that only 1.2% of China's growth last year came from exports. But other economists predict that GDP growth could fall to 7% or 8% next year. Marc Faber, an investor and economist, said on US business TV channel CNBC that "growth in China, at best, is 5%", the BizChinaUpdate website reported on Wednesday.

Smart Union's decision to close its two factories in Dongguan, a heavily industrialized area of Guangdong province, threw 7,000 people out of work. More closures are certain to follow. Before Beijing announced the export rebate changes, Wang Zhiguang, vice chairman of the Dongguan Toy Industry Association, told Guangzhou Daily: "Of the some 3,800 toy factories in Dongguan, no more than 2,000 are likely to survive the next couple of years."

About 3,900 toy factories across the country went out of business in the first seven months this year, according to the General Administration of Customs.

The closures are also hitting other sectors. Bailingda Industrial (Shenzhen) Co closed its production line on Monday, leaving 1,500 staff out of work. Bailingda, with an annual capacity of 5 million units, produced coffee pots, irons, radiators and other appliances for the North American and European markets.

Xiao Yong, whose firm sells Christmas trees and gifts, told China Daily that orders were at half last year's level. "Many toy makers in Dongguan rely too much on orders from the US and Europe," he said. "The financial crises there have led directly to a reduction in orders."

Increased safety concerns have also added to costs. "After the EU and the US changed the market thresholds for China-made toys, and because of recalls in 2007, our testing fees have gone up by about 25%," Xiao Yong said.

An official with the Guangdong Provincial Labor and Social Security Bureau, who declined to be named, said the bureau had been working with the Provincial Development and Reform Commission to set up a benefit fund to help workers in difficulties because of unpaid salaries.