Wolf Richter: China’s Hard Landing Suddenly Gets a Lot Rougher

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

This has become a sign of the times: Foxconn, with 1.3 million employees the world’s largest contract electronics manufacturer, making gadgets for Apple and many others, and with mega-production facilities in China, inked a memorandum of understanding on Saturday under which it would invest $5 billion over the next five years in India!

In part to alleviate the impact of soaring wages in China.

Meanwhile in the city of Dongguan in China, workers at toy manufacturer Ever Force Toys & Electronics were protesting angrily, demanding three months of unpaid wages. The company, which supplied Mattel, had shut down and told workers on August 3 that it was insolvent. The protests ended on Thursday; local officials offered to come up with some of the money owed these 700 folks, and police put down the labor unrest by force.

These manufacturing plant shutdowns and claims of unpaid wages are percolating through the Chinese economy. The Wall Street Journal:

The number of labor protests and strikes tracked on the mainland by China Labour Bulletin, a Hong Kong-based watchdog, more than doubled in the April-June quarter from a year earlier, partly fueled by factory closures and wage arrears in the manufacturing sector. The group logged 568 strikes and worker protests in the second quarter, raising this year’s tally to 1,218 incidents as of June, compared with 1,379 incidents recorded for all of last year.

The manufacturing sector is responsible for much of China’s economic growth. It accounted for 31% of GDP, according to the World Bank. And a good part of this production is exported. But that plan has now been obviated by events.

Exports plunged 8.3% in July from a year ago, disappointing once again the soothsayers surveyed by Reuters that had predicted a 1% drop. Exports to Japan plunged 13%, to Europe 12.3%. And exports to the US, which is supposed to pull the world economy out of its mire, fell 1.3%. So far this year, in yuan terms, exports are down 0.9% from the same period last year. As important as manufacturing is to China, this debacle is not exactly conducive to economic growth.

The General Administration of Customs, which issued the report, added: “We could see relatively strong downward pressure on exports in the third quarter.”

Then there’s the plunge of the China Containerized Freight Index (CCFI), which tracks contractual rates and spot market rates for shipping containers from major Chinese ports to major port around the world. Last week, the CCFI dropped 2.4% to 798.89, near its multi-year low at the beginning of July. It is now 23% below where it was in February, and 20% below where it had been in 1998, when it was set at 1,000!

The beaten-down shipping rates are a function of an oversupply of ships and weak global demand for goods manufactured in China. Today’s export numbers once again confirm the dynamics tracked by the freight index.

Another chilling data point: imports plummeted 8.1%, after having already dropped 6.1% in June. They’re down for the ninth month in a row, in part due to crashing commodity prices. Year-to-date, imports dropped 14.6% in yuan terms.

This caused China’s trade surplus to drop 8.5% from June, to $43.03 billion.

Producer prices in July dropped 5.4% year over year, down for the 40th month in a row, the National Statistics Bureau said on today. It pushed the Producer Price Index to the worst level since October 2009. Who gets the credit? Crashing commodity prices, competitive pressures facing Chinese manufacturers, and weak demand for Chinese goods.

The yuan has remained stable against the dollar, even as the dollar has risen sharply against other major currencies, including the euro and the yen, both of which are being aggressively watered down by their respective central banks.

The strong yuan supports domestic buying power. It should support imports, but it hasn’t. It also weakens the competitiveness of manufacturers in China, which are already facing enormous cost pressures. And it allows Chinese firms to borrow cheaply in dollars and invest overseas. So the headwinds for the manufacturing sector aren’t about to subside.

And China’s foreign exchange reserves have been diving: by $42.5 billion in July, the People’s Bank of China said on Friday, the third decline in a row. At $3.65 trillion, foreign exchange reserves are at a two-year low, down 16% from their peak of $3.99 trillion in June last year.

What is causing these persistent capital outflows? According to the People’s Daily, the official rag of the Chinese Communist Party, citing a banking industry researcher: “Market expectations of an appreciation in the US dollar” and worries about weak economic growth in the second half.

Despite the 7% GDP growth published and hotly defended by the Chinese government, it is increasingly clear that the country is beset with a host of immense problems, after a debt-fueled binge of overbuilding and over-stimulating. These problems aren’t going to evaporate. And whether or not the government is willing to admit it, they’re dragging down vast sectors of the economy.

The situation in China has global automakers fretting publicly, with visions of a “downward spiral.” Read… The Unnerving Thing Global Automakers Just Said About China’s Economy

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