Tags: china

China Too Costly for Manufacturers

Tuesday, 09 Sep 2008 08:30 AM

China has been enjoying a robust annual manufacturing growth rate recently of 11 percent or more, but the party may soon be over.

According to The New York Times, Chinese factories reported a sharp drop in new orders in August. Economists now expect Chinese growth to go as low as 9 percent or 9.5 percent over the next year. Exports are barely growing, several Chinese factories are either closed or cut back on their consumption, and the real estate market is weakening, particularly in southeastern China.

"China has slowed down a lot already, but it's going to slow down more," Hong Liang, the senior Chinese economist at Goldman Sachs in Hong Kong told The Times.

That rate, says Liang, will make it harder to supply jobs to the millions of Chinese who are moving to cities from rural areas looking for work.

In addition, any slower growth could prove a shock to workers who have been receiving double-digit pay increases each year, as companies struggle to find enough labor to keep factories open,

Chinese policymakers took a series of steps over the last five years to keep inflation under control, and now they're starting to remove them to prevent growth from slowing too much.

China's currency, for example, rose sharply against the dollar in the first half of this year, and China's central bank has aggressively lowered it against the dollar in each of the last four trading days.

But Darren Gardener, chairman of the international practice at the law firm of Seyfarth Shaw, tells Moneynews that the manufacturing-related issues in China are less about the exchange rate than they are about increased costs.

"China is a heavily regulated and complex jurisdiction. Corporate citizenship is a key feature in the global economy, and U.S. companies are always striving to comply with the law which is difficult and time consuming in China," Garener tells Moneynews.

"This impacts on the companies' ability to make quick commercial adjustments and overall adds to the expense and uncertainty in their operations. In a low cost environment, people can tolerate this. When combined with the fact that China is developing and generally now more expensive, it means that the perceived cost advantage may of itself no longer actually of itself justify the investment."

Chinese manufacturers are now looking for other, lower-cost markets in which to make their products. H. David Hennessey, a professor of marketing and international business at Babson College, near Boston, told Moneynews that the country is looking at Vietnam and North Korea as possible alternative manufacturing sites because the labor rates were significantly less than in China.

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China has been enjoying a robust annual manufacturing growth rate recently of 11 percent or more, but the party may soon be over.According to The New York Times, Chinese factories reported a sharp drop in new orders in August. Economists now expect Chinese growth to go as...
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2008-30-09
Tuesday, 09 Sep 2008 08:30 AM
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