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China's bosses are abandoning ship

As tens of thousands of factories go under, owners go on the lam.

November 03, 2008|Don Lee

Shaoxing, China — First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

And just like that, China's biggest textile dye operation -- with four factories, a campus the size of 31 football fields, 4,000 workers and debts of at least $200 million -- was history.

"We're pretty much dead now," said Mao Youming, one of 300 suppliers stiffed last month by Tao's company, Jianglong Group. Lighting a cigarette in a coffee shop here, the 38-year-old spoke calmly about the bleak future of his industrial gas business. Tao owed him $850,000, Mao said, about 60% of his annual revenue. "We cannot pay our workers' salaries. We are about to be bankrupt too."

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.

Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold -- prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories -- many operations were pushed over the edge.

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China's engine slows

China's industrial decline is a main factor in the sharp economic slowdown of late. The nation's gross domestic product grew at an annual rate of 9% in the third quarter, the lowest in five years and worse than what analysts had forecast. China's GDP expanded 11.9% last year. Now, economists worry that the one big remaining engine of global growth is rapidly losing steam.

Chinese leaders are trying to maintain stable and fast growth to control rising joblessness and the risk of political and social turmoil. Last month, Beijing increased tax rebates for many exported goods and pledged to take other steps to spur development, including prodding banks to boost lending to small companies. But many businesses and analysts are not optimistic.

"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."

The wave of factory closings began in Guangdong province, where the nation's economic reforms were launched three decades ago.

The region accounts for about 30% of China's exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.

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.

"Don't even mention the U.S. market," grumbled Zhong Shijun, general manager of Foshan City Golden Furniture Co. "Even our EU market is dropping seriously in the last two months because the euro is depreciating."

Toy makers are among the hardest hit. More than 3,600 such factories have closed -- about half the industry's total, government figures show. Most were small operations, but last month Smart Union Group's three huge factories stopped production, leaving more than 8,700 workers jobless.

After workers protested in the streets, Guangdong's government said it would cover $4 million in back wages and help them find jobs. But many others have no one to help them. Migrant workers generally don't qualify for unemployment benefits, and although China's bankruptcy laws give unpaid workers priority, that's of little value if owners run away and there are few corporate assets.

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Left without wages

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