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China’s Manufacturing ‘Pearl’ Loses Luster

Despite ongoing factory closures, thousands of lost jobs and apparel production moving out of China, the Chinese central government has yet to release any...

Thousands of factories have closed in the Pearl River Delta region, seen here in a satellite image.

Thousands of factories have closed in the Pearl River Delta region, seen here in a satellite image.

WWD Staff

Appeared In
Special Issue
WWD Sourcing Horizons issue 05/13/2008

BEIJING — Despite ongoing factory closures, thousands of lost jobs and apparel production moving out of China, the Chinese central government has yet to release any plans or policies to deal with shifting production that has come with higher costs.

This story first appeared in the May 13, 2008 issue of WWD.  Subscribe Today.

“I don’t understand why the policy makers are not reacting to a situation in which thousands of factories are being closed and exports are decreasing greatly,” said Song Hong, a senior international trade research fellow with the Chinese Academy of Social Sciences.

Song, who recently returned from a fact-finding trip to the Pearl River Delta, China’s manufacturing hub, said she found that thousands of factories had been shuttered and moved elsewhere. Other analysts and researchers speculate that higher costs and logistics issues have forced factories to relocate to Vietnam, other parts of Asia and to Eastern Europe. Most agree that though China still has an abundant labor force and good production capabilities, the country is losing its spot as the prime destination for new apparel production.

The evidence of a China production slowdown was most apparent in recent figures released by the Canton Import & Export Fair, the country’s largest and oldest trade exposition. This year’s spring fair showed a marked declined in business in apparel orders, particularly from the U.S. The number of American buyers at the fair was down 26 percent this year, while overall business was down 12 percent. Trade show orders from the U.S. declined 25.5 percent, while orders from Europe were down 12 percent.

China’s costs have risen rapidly as a result of the combined impacts of several major government policies that were intended to rebalance the country’s economy, protect labor rights and slow its politically sensitive trade surplus. In January, the country enacted a new labor contract law that protects rights of workers and raises costs of employers by holding them to strict obligations like benefits and tenure. At the same time, the central government enacted a tax unification law that eliminated tax breaks on most foreign firms doing business in China, with the net effect of raising taxes on most multinational companies.

At the same time, wages — stagnant for a decade among the migrant workers who typically staff factory lines — have begun to rise steadily. In addition, the Chinese yuan is appreciating at a fast pace, expected to increase in value by as much as 12 percent this year, while the U.S. dollar continues its global decline.

Song said the changes are all part of a central government strategy to improve the caliber of manufacturing in China. Still, Song said the government needs to enact some policies to bridge the gap as manufacturers transition from low-end work to other production.

Cao Honghui, economics professor with the Chinese Academy of Social Sciences, said there are a number of steps the government should take to address the loss of manufacturing. Among those, he said, import and export taxes should be adjusted, and the government should do more to attract investment to central and western parts of China. Although some factories leaving Guangdong province are heading to western China, many more are leaving the country entirely.

Meanwhile, the China Textile Industry Association is offering its own recommendations to the government about possible policy measures. The industry group wants the government to consider lowering export tax rebates, adjust tax policies on certain textile production equipment to make it less expensive, step back and offer a longer adjustment period on the new labor contract law and offer more support to the textile industry to upgrade technology and work on domestic branding.