Ghost factories

SMEs in China are facing worse conditions than during the 2008 crisis

Ghost factories

Aoxia is eerily quiet. The garment exporting zone in Shenzhen once housed hundreds of busy factories, but the rumble of sewing machines has been silenced thanks to a wave of closures. Those workshops that remain are operating for just three to five days a month.

Aoxia is representative of a growing crisis enveloping thousands of small and medium-sized firms (SMEs) in Guangdong and elsewhere in China. And as if things weren’t bad enough, some could soon be getting a higher tax bill too.

That’s because in a bid to encourage investment in higher value industries, Beijing is considering cutting the VAT it rebates back to various exporters. Among them are the textile exporters, who could see their rebate reduced from 16% down to 11%. The Hong Kong-based Textile Council estimates that would be enough to force a third of garment makers out of business in the Pearl River Delta.

SME bosses are at breaking point – for a swathe of reasons. Many have been hit the appreciating yuan (up by nearly 24% against the dollar over the past five years). Then there are wage pressures, especially in the coastal manufacturing zones. “The original monthly salary we paid was about Rmb1,000 per worker,” lamented garment factory owner Liu Quande to The Economic Observer, “but now it’s generally Rmb2,000 or more.”

That’s motivated some factory bosses to shift production to the country’s interior (places like Jiangxi, Hunan and Sichuan) in search of cheaper labour. But they then need to factor in higher logistics costs. “[Industry insiders] estimate that just moving from Shenzhen to Qingyuan [a more distant Guangdong city] makes businesses unprofitable,” writes the EO, “let alone moving to the distant central and western regions.”

For an even cheaper supply of workers, some SME owners are leaving China altogether, and setting up shop in nearby countries like Vietnam and Cambodia (a trend WiC has covered in previous issues).

But margin pressure has hit garment makers particularly. Higher cotton prices (which spiked last year in part due to floods in Pakistan and Australia) led to a drop in sales. Raw material costs started to fall in April, but price volatility had already stretched many manufacturers to the limit. Ironically, SMEs that were ‘lucky’ enough to get bank loans over the past two years may be worst off. “[They invested in] expanding their capacity a lot in the second half of 2009 and 2010,” explains Caijing magazine. “At the time loans were easy to get – now the state is tightening credit causing problems with cashflow and several businesses have gone bankrupt.”

That leaves SME owners looking for an escape route. “In less than five years, I will dispose of all my industrial businesses,” Jiangsu cotton-mill owner Yu Yao declared to the magazine. He says many factory bosses are abandoning industrial production, finding it more lucrative to switch their focus to gold and real estate speculation.

Yu himself plans to set up a ‘private lending’ business – financing other cash-strapped SMEs (see Talking Point for the story of a private lender that has gone bust in Xiamen). But Yu probably won’t be too perturbed, focusing instead on the potential returns of around 30%, which he says is far more lucrative than the best-case 10% he can get cotton spinning.

SMEs have often been praised as the lifeblood of the nation’s ‘Made in China’ growth model. In the current conditions, thousands look like they could disappear. “For small companies it is even more difficult than the situation in 2008,” Shen Ligang, managing director of the Zhejiang Regional Economic Cooperation Association told Caixin.

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