For the first two weeks of August, everything seemed normal at Dongfang Plastic Products, one of Foshan’s largest plastics producers. Not only did the company seem to be on track to meet its annual sales target of Rmb450 million ($70 million) but company life was generally upbeat. On August 5, a week of sports events for employees kicked off, to conclude with a banquet where prizes would be handed out.
At the meal, company head Kong Yongqi gave a speech. He looked preoccupied and did not talk for long, an employee told National Business Daily. For the company’s thousand staff, this was perhaps the only clue that something was amiss.
Less than a week later, and news started to spread that Kong was gone. On the same day, the plant closed, leaving staff, clients and creditors shocked by events.
Dongfang’s rapid closure has caused a few problems for the local operations of Japan’s Toshiba, for which it was a plastics supplier.
The picture now emerging is of a company overwhelmed by debt. Dongfang’s closure was forced by a court order obtained by Nanhai Rural Credit Cooperative, from which Kong had borrowed Rmb93 million. In total, Dongfang owed Rmb140 million to creditors, although this doesn’t include money owed to suppliers.
Employees are also out of pocket, forcing the local government to pay wages for August. Workers agreed a payoff in which they receive one month’s salary for every year served in the company, paid out by the Nanhai district government.
In some ways the situation at Dongfang Plastics is far from unusual. Companies across China are reporting tough business conditions, especially in Guangdong province (where Foshan is located). Labour and land costs there have been rising faster than in many other parts of China, forcing factory owners to consider moving elsewhere.
Nor is it unusual for owners to take drastic measures to avoid their creditors – a few months ago we wrote about the murky suicide of a former billionaire (see WiC109).
But the fear is that a gloomier economic outlook will lead to a dip in global trade, which in turn could drag more Chinese manufacturers towards bankruptcy. The government does not want a repeat of the mass factory closures of early 2009. Nor will it want to get into the habit of paying the wages of displaced workers.
The data is mixed. In July, HSBC’s purchasing managers’ index hit 49.3 (a score below 50 represents a contraction), which was the lowest score for 28 months. August numbers were a bit better at 49.9, but that still indicates a contraction. The sub-index of the PMI that covers new export orders also continued to contract in August, with curtailed demand from Europe and the US.
Foreign buyers are not only postponing new orders with their suppliers, they are also cancelling existing ones, Zhou Dewen, president of the Wenzhou SME Development Association told 21CN Business Herald. Factories that do receive orders are not always accepting them, as they may no longer be profitable on the terms proposed.
The government is doing its best to quell rumours about larger scale retrenchment. “Based on our studies, the reported mass bankruptcy of SMEs in some provinces along the east coast is not true,” Zhu Hongren of the Ministry of Industry and Technology told the Global Times. Data from the SME Bureau of Guangdong Province was also cited by the newspaper: in the first quarter of the year, the number of SMEs in the province actually increased, by 14.7%. There is similar data for Zhejiang province too.
That doesn’t seem to fit with much of the anecdotal evidence now beginning to filter through the Chinese press.
And National Business Daily points to the knock-on effects from the failure of firms like Dongfang Plastic – when a manufacturer suddenly fails it also disrupts supply chains at other firms, magnifying the difficulties.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.