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Monday, November 03, 2008


things in china are not going well

the latest in what has become a long string of unnerving reports comes via calculated risk and the los angeles times.

Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year, said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year's end, he said, more than 100,000 plants will have closed.

As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade. ...

"Honestly, I think whatever measures government would take at the current stage would not turn around this trend," said Ye Hang, an economics professor at Zhejiang University. "The government can only try its best to put out a fire here and there."

In recent weeks, there have been many fires, increasingly large-scale. In Zhejiang province, south of Shanghai, Ye counted at least six major bankruptcies, including Jianglong; Feiyue Group, China's biggest sewing machine maker; and Zhejiang Yixin Pharmaceutical Co., among the largest in that industry.

"Of these six, one [owner] committed suicide, one was detained by police, and the remaining four all escaped," he said. "I can imagine that in the future, there would be more such cases as a result of the chain reaction."

By the official numbers, Chinese exports remained brisk through September, except for a few categories such as apparel, which fell 3% in September from the same month in 2007. But many exporters aren't making a profit, and others are seeing shrinking orders or are starving for cash. Newspapers in Hong Kong, which is close to Guangdong, have been running virtually daily reports of the latest factory to falter.

to say that so many tens of thousands of companies have closed is not particularly useful without context -- a lot of chinese companies are small shops. but when a series of the largest companies in their respective fields are going belly up, there's no question that china is in dire straits. and there are in fact glimpses of context:

Toy makers are among the hardest hit. More than 3,600 such factories have closed -- about half the industry's total, government figures show. ... Lau's trade group has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days. "Once workers go home, they can close down the factory quietly," he said in an interview in Hong Kong.

in a credit crunch, it's unlikely that many companies will be able to run at a loss for very long -- and time appears to have run out for many, with many more to come. via clusterstock, chinese PMI is indicating actual out-and-out contraction in the manufacturing sector of the chinese economy.

The China Federation of Logistics and Purchasing said its purchasing managers' index, a broad measure of new orders, exports and other factors, fell to 44.6 in October. It was the lowest level since the survey began in 2005 and a drop from September's 51.2.

as i've said before -- and as CR illustrates nicely here -- the upshot will be growing difficulty in financing american debt. treasury is already encountering resistance, as noted on bloomberg with some interesting quotes.

The next president may find foreign investors, the biggest creditors to the U.S., unable to absorb a growing supply of Treasury bonds as the financial crisis prompts nations to invest in their own banks and currencies. That would drive up yields just as a widening budget deficit pushes borrowing needs to a record ...

``The U.S. Treasury Secretary is trying to convince other countries, including China and Japan, to buy its government bonds,'' said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., the nation's biggest stock underwriter. ``This is the first time a developed country needs help from developing countries to ride out its crisis.'' ...

``Some of these foreign governments now are a little bit worried they need to prop up their own financial systems and potentially deal with their own deficits, so taking the money and shipping it off to the U.S. isn't as attractive as it used to be,'' said Jamie Jackson, who oversees government and agency debt trading at RiverSource Investments. The Minneapolis-based firm manages $93 billion of fixed-income assets.

``At some stage, such a large increase in issuance may lead to a sharp sell-off in U.S. Treasuries and the U.S. dollar,'' said Shinji Kunibe, a senior money manager who helps oversee $847 billion globally at the Tokyo branch of JPMorgan Asset Management.

stephen jen of morgan stanley still thinks deleveraging favors the dollar, but when that ends things could be very difficult.

UPDATE: nouriel roubini via clusterstock on china.

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