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Manufacturing sector-led troubles show no signs of abating

BEIJING -- Market confusion triggered by China's economic slowdown is showing few signs of subsiding.

     China Resources Cement Holdings said last Wednesday that its profit is estimated to have contracted sharply in the year ended in December.

     The cement maker belonging to state-owned Chinese conglomerate China Resources noted large foreign exchange losses resulting from the yuan's deprecation as a possible reason for the poor showing.

     The stock of the company plunged to an all-time low during intraday trading on the Hong Kong market the following day.

     On Jan. 4, China Eastern Airlines announced the advance repayment of foreign currency debt totaling $1 billion to avoid an increase in debt serving cost because of the weaker yuan.

     Similar moves are spreading among real estate and other businesses that have expanded liabilities denominated in foreign currencies.

     The accelerating fall in the yuan's value has contributed to an 18% decline in the Shanghai Stock Exchange Composite Index since late last year.

     Behind the financial market chaos shaking the world economy are the ongoing slowdown in the Chinese economy and uncertainties over its outlook.

     In particular, the Chinese manufacturing industry is in deep trouble. China's manufacturing purchasing managers' index, which provides an early indication of economic activities in the nation's manufacturing sector, has been showing signs of an economic slump since last spring.

Social unrest

A tumultuous scene was created before a plant of Shenzhen Electronics, an information technology company in Guangdong Province. The company had grown rapidly producing smartphones on behalf of Samsung Electronics of South Korea and other companies, but collapsed in late December as a result of a plunge in orders received. Police officers were mobilized to subdue thousands of angry workers who gathered there to demand wage payments.

     Trouble is not limited to Guangdong. Many cement plants have halted operations in Hebei Province over the past month, in line with the Chinese government's orders for suspension of production amid excessive price-cutting competition.

     "My income in 2015 plunged to less than 10% of its peak," lamented a male employee in his 40s of a state-owned coal mining company in Henan Province.

     A local newspaper reported that only around 30% of manufacturers are paying wages as planned.

     The manufacturing industry, which propped China's rapid economic growth, now presents an "old China." Manufacturers are struggling under deflationary pressure, symbolized by wholesale prices staying below year-before levels for nearly four years running, on top of structural problems such as rising labor costs and excess capacity.

     Correctional moves in the Chinese manufacturing industry have caused falls in natural resources prices which, combined with an interest rate hike in the U.S., have resulted in investors increasingly averse to risk.

     Premier Li Keqiang urged representatives of more than 20 steel and coal mining companies in Taiyuan, Shanxi Province, on Jan. 4 to eliminate their overcapacity with determination even to "cut off arms."

     The government has "no intention of introducing strong economic stimulus measures to raise domestic demand," Li said.

     Even if the government stimulates demand with huge fiscal spending, growth cannot be sustained as long as inefficient companies and industrial sectors remain. Chinese government officials concerned have a strong sense of crisis, worrying that massive fiscal spending to save "zombie companies," which cannot cope with changes in their markets, will lead China into a long-lasting slump like that experienced by Japan after the collapse of its bubble economy.

     Pressure for structural reform under the government's initiative is undeniably making the trouble in the manufacturing sector more noticeable.

     China is exporting deflation. With the elimination of overcapacity making hardly any headway, surplus steel and other products are being distributed around the world at prices lower than production cost.

     Exports of steel products from China topped 100 million tons for the first time in 2015, creating a vicious cycle of unstoppable price falls.

     The shoots of a "new China" are expected to sprout as the Chinese leadership draws up a blueprint to make the nation's economy grow stably, though at a slower pace.

     Online sales have been growing more than 30% every year in China and have kept increasing. The ratio of the services sector to gross domestic product has risen to more than 50% from the 30% level in the early 1990s.

     China is seeking a growth model led by personal consumption and technological innovation. Despite the slowdown, China is believed to have retained real-term growth around the 6% level in 2015.

     Nevertheless, the manufacturing sector continues to exert the greatest influence on markets as it generates wide-ranging ripple effects on other industries and has a large number of indexes, such as orders received, to indicate economic prospects.

"China risk"

Dark clouds looming over the manufacturing sector have boosted concerns about the whole of the Chinese economy, reflecting the so-called "China risk" more clearly on the financial market.

     Driven by these anxieties, capital is fleeing China. Foreign currency reserves of the country decreased by $500 billion in 2015, the first fall in 23 years, largely because the Chinese central bank repeated dollar-selling and yuan-buying market interventions in a bid to halt the decline in value of the Chinese currency.

     More than $100 billion leaves China every month. The management of the Chinese economy will become more difficult if cross-border financial transactions grow more erratic.

     Chinese authorities are gravely concerned about the yuan's plunging value. Jitters are growing stronger over whether they can properly deal with changes in the real economy and the flow of capital due to the lack of transparency in their policymaking process.

     Government-run Chinese media deny there is an urgent need to change yuan into dollars. But depositors have been seen forming long lines in front of banks in Shenzhen, Guangdong, near the border with Hong Kong.

     One 21-year-old owner of a venture business said he was preparing to withdraw all of his yuan-denominated deposits and convert them into Hong Kong dollars.

     "The yuan will weaken for sure," he said. "I will soon receive funds for investment from Singapore and immediately change them into U.S. dollars from yuan."


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