Wednesday 31 December 2008

Chinese Factory Suppliers Feel the Pain from Slump in Exports

Never mind the banks. Shaoxing County in eastern China has started a huge polyester bailout.

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Guanyu said...

Chinese Factory Suppliers Feel the Pain from Slump in Exports

By Fang Yan
Reuters
29 December 2008

SHANGHAI: Never mind the banks. Shaoxing County in eastern China has started a huge polyester bailout.

The county of 710,000 people in Zhejiang Province, near Shanghai, has arranged 1.5 billion yuan, or about $220 million, in aid to help Zhejiang Hualian Sunshine Petro-Chemical, a major producer of purified terephthalic acid, which is used to make polyester. The aid helped the company resume production after financial difficulties had shut it down.

The rare offer of government money to a non state company highlights the spread in China of the effects of the global economic downturn, from small exporters that bore most of the initial brunt to bigger companies in more basic industries.

“We had to bail out Hualian Sunshine, even though it was privately held,” said a Shaoxing municipal government official, who declined to be named because of briefing rules. “Hualian Sunshine is the biggest supplier to our textile industry, which gives us half of our fiscal revenue. The stakes were just too high for us to sit there and let it die.”

Signs of problems in the export-driven Chinese economy started in the coastal south, where hundreds of small-scale toymakers and garment companies were forced out of business as the global financial crisis battered markets in Europe and the United States.

Many initially blamed currency appreciation. But relatively anaemic annual growth of 5.4 percent in Chinese industrial output in November, the worst reading in nearly 10 years, suggested the problem had gone far beyond the yuan’s value, which largely stopped rising in mid-July.

A number of suppliers, like Sinopec Yizheng Chemical Fiber and Nanjing Chemical Fiber, slipped into losses in the third quarter as their orders dried up. The chemical industry has been among those hit hard, including makers of polyester, widely used in clothing and a variety of plastic goods.

“Due to the severe situation facing the downstream business and slowing demand, the domestic polyester industry is in an extremely difficult operating environment,” Sinopec Yizheng said in its quarterly financial report.

That reflects a slowdown in the rate of growth in exports of clothing and accessories, which grew 3.1 percent in the first 11 months of this year, compared with a 22.2 percent rise in the same period of 2007, official data showed.

Industry analysts say the situation will get worse next year as the global economy falters, forcing some smaller suppliers out of business.

“It’s a domino effect,” said Gao Guo, an analyst with Huatai Securities. “If the garment exporters continue to fall one after another, how can you expect their upstream suppliers to stay in the business?

“Industry wide consolidation is inevitable next year, as there is no sign of an end to the global financial crisis.”

Under the bailout arranged by Shaoxing County, the county government paid 600 million yuan for a stake of 33.44 percent in Hualian Sunshine, with a private local company, Zhejiang Yuandong Chemical Fiber Group, paying 900 million yuan for a stake of 50.16 percent.

Hualian Sunshine’s problems were caused in part by losses from betting on the futures market in purified terephthalic acid, the Shaoxing government official said.

The company had a net loss of 1.17 billion yuan on sales of 10.93 billion yuan in the first three quarters, according to China Union, which held 26.44 percent of the company before the bailout and now holds 16.4 percent.

A China Union spokeswoman said Hualian Sunshine had halted production in early October but had been able to resume about a month later, after the bailout.

Qian Xiangjing, an analyst with CITIC-Kington Securities, said that during the China boom of recent years many firms, especially privately run family businesses, had management problems or took risks to make quick profits. “The weak economy has now exposed some of the skeletons,” he said.

In recent months, Beijing has unveiled a series of support measures, including export tax rebates for exporters of textiles and other goods, as well as a 4 trillion yuan fiscal stimulus package and repeated interest rate cuts.

Local governments like Shaoxing are also trying to prop up the economy.

After giving aid to Hualian Sunshine, the Shaoxing government is considering lending a hand to another troubled maker of purified terephthalic acid, Zhongheng Group, whose businesses also include steel making and property.

“We are still discussing ways to help out Zhongheng,” the official said. “I am afraid we might have to intervene when other big taxpayers here fall apart. What else can we do?”