Credit crisis looms over 'world's factory'

As they prepare for China's biggest export fair this week, managers at Shunde Xiongfeng Electric Industrial Co. are anxious, CNN reported.

A young woman works at a shoe factory in Chongqing Municipality in China.

Sales of electric fans are down this year, and the financial crisis will likely further cut demand from overseas. The 5,000-employee company in the southern city of Shunde, near Hong Kong, sold 6 million electric fans abroad last year.

"We are worried that if our clients are short of capital, they might shut down," said Shunde's export manager, who would only give his surname, Zeng. "That's certainly bad for us."

China has been known as the world's factory for everything from toys to T-shirts, and exports have powered its growth in recent years. But exports are taking a hit from the global financial crisis because of lower demand from overseas and tightening credit from state-owned banks.

A slowdown in Chinese exports would ripple through the world economy as China imports fewer raw materials, half-finished goods for assembly and supplies, such as Australian iron ore or factory equipment from the United States, Europe and Japan. Raw materials used for exports made up half of China's nearly US$1 trillion in imports last year. Watch analysts say China is now the single most important source of economic decisions in the world "

China's economy is still expected to expand by at least 9 percent this year, and its banks are flush with cash and hold little risky debt.

But ithe nation's economy has been weakened by a bursting housing bubble and an anemic stock market, and the hope that China's appetite for imports will rescue other countries has been tempered. China accounted for a third of global economic growth in 2007, according to the World Bank.

"We still believe that China's growth will be relatively robust. That is helpful for the world economy," said Louis Kuijs, the World Bank's senior economist in Beijing. "Unfortunately, one economy like China will not be enough to keep world growth going....China just isn't big enough."

The Canton Fair, which opens Wednesday, will offer a measure of demand for Chinese goods, as exporters and customers gather in Guangzhou, the heart of China's export-driven manufacturing industries. Philip Richardson, an American who manufactures high-end stereo speakers in Guangzhou, said orders from the U.S. have dropped over the past two weeks.

"When they see the markets go down, they stop buying," he said.

Customers have canceled meetings with him at a Hong Kong trade show next week. Nine of 12 retailers have backed out of visits to his factory in the past two weeks. And as he stood talking, Richardson received a phone call from the Chinese vendor who makes his stereo cabinets. The vendor said he had lost so many orders that he could not pay his employees, and asked Richardson to pay early on a bill due next month.

The financial crisis is the latest blow in an export situation that was already weakening along with the U.S. and European economies. According to customs figures, the growth rate for China's exports in the first quarter of the year declined for the first time in three years. Exports make up just 5 percent of China's economic output, but account for about 20 percent of growth.

Foreign sales of Chinese-made electric fans fell 21 percent in July from the same month last year, according the Chinese Household Electric Appliance Association. In a survey last month, the central bank said export orders at Chinese factories had fallen to their lowest level since 2005. One of the country's largest garment makers, Zhejiang Jianglong Textile Printing and Dying Co., went bankrupt last week.

"I don't think the economy has troughed," said Tao Wang, a UBS economist in Beijing. "That will affect China's demand for commodities, machinery and so on. In the next six months, I think imports from all these countries will slow."

The Tianjin Excellent Import & Export Co. southeast of Beijing expects this year's sales to drop to half the 2007 level of US$50 million. The company is trying to boost sales to Japan and other markets and might have to fire some of its 100 employees, its manager said.

"We don't have a better strategy yet to maintain the business," said the manager, who would only give his last name, Yang. "If we export US$1 million and need 50 people, then that falls to $10,000, you can do the math."

Exporters are also having a harder time getting credit because China's state-owned banks are trying to cut loans to companies with exposure to foreign risks, said Nan Hanxin, a banking industry analyst for Central China Securities. They now favor monopoly state-owned companies with high credit, Nan said.

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