DONGGUAN was once a boom town. Part of China’s Pearl River Delta powerhouse, the 6m population claimed to make 20% of the world’s electronic gadgets. It also cranked out almost a third of its toys, a fifth of its sports shirts and 10% of its trainers.
A single company, Taiwan-owned Yue Yuen, employed 40,000 people directly in four factories and supported more than 100,000 jobs producing footwear for the likes of Nike, Adidas and Reebok.
No longer. Dongguan is suffering. Most of those Yue Yuen jobs have gone to other places in southeast Asia. The company’s four factories are now reckoned to employ fewer than 8,000 workers. Dongguan is grimy and depressed.
Less than 100 yards from the gates of one of the footwear plants stands a huge shopping mall. It has 2,000 retail units. Just two are open. “Some days we make 100 yuan [£10] and some days nobody comes at all,” said one shop manager.
Even Dongguan’s notorious sex industry — once estimated to account for a staggering one-seventh of the city’s economy — has collapsed. Brothels, nightclubs, dance halls, karaoke lounges and “foot-washing” establishments have closed, because of both the downturn and a government clampdown on corruption. “About 200,000 people involved in the entertainment business have left the city,” said one local.
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One renowned “entertainment venue”, the five-star Lotus hotel, known in its heyday for catering to the desires of high-ranking officials, is now a vegetable field.
Welcome to downturn China. Welcome, too, to ferocious upheavals in the world‘s financial markets. China is now the second-largest economy on the planet. What happens in Beijing, Shanghai — and Dongguan — matters.
The current bout of Chinese economic flu has infected financial markets around the globe. Policymakers’ hopes of nudging inflation in leading economies such as America, the eurozone, Japan and Britain back towards what they see as a comfortable 2% are receding. And as those hopes recede, the prospect of interest rate rises moves further into the future.
In the meantime, fears about China’s economic sickness have caused wild gyrations in financial markets, including the FTSE 100, which lost more than 8% this month. .
For years, China’s economic expansion was spectacular. Over the decade to 2014, output in dollar terms grew fivefold. Five years ago, the economy’s annual percentage increase was in double figures. That is no longer the case, but only a few months ago, observers were expecting growth of about 7% this year. Now, those figures are being trimmed. The official Chinese line is that 6% is more likely.
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Even that could prove optimistic. Many observers are sceptical about the reliability of the country’s official statistics. Capital Economics in London has pointed out that China’s reported unemployment rate is suspiciously consistent at just over 4%. And although official figures say GDP in the second quarter was 7% up on a year earlier, others say this overstates growth: the consultancy Lombard Street says the true number could be below 4%.
In July, China’s exports, for years the engine of the economy’s expansion, were 8.3% lower than 12 months earlier.
The knock-on effects have been widespread. The cost of shipping a container from Shanghai to Rotterdam has fallen 60% since July. China accounts for 30% of the world’s entire container traffic.
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Prices of key commodities have tumbled as it has become increasingly clear that Chinese industry’s appetite for raw materials will not continue to grow at an exponential rate.
Not that commodity prices concern China’s leaders. They want to keep the economy moving to maintain the support of the republic’s 1.4bn people. Hence the string of measures — some would say panic measures — to try to inject new life into the economy.
The Chinese central bank has cut interest rates on five occasions since late last year. It also reduced the size of deposits that banks have to hold and injected 470bn yuan into the banking system over two weeks.
Crucially, the currency’s international value was cut this month to try to make exports more competitive.
The striking fact is that the prospect of seeing 3% annual growth in their economies would delight the leaders of most countries. But for China, it would be seen as abject failure. This is a country that has become used to expansion at a far faster rate. And it is something the rest of the world has come to expect — and rely on.
FOR years, Guangdong province, in which Dongguan sits, was China’s economic window on the world. Now, the region’s once-booming manufacturing sector is showing signs of acute strain. A survey for The Sunday Times last week in four provincial cities found evidence that the export miracle is losing its shine. Factories are closing, workers are being laid off and consumption has been hit by the domestic slowdown and president Xi Jinping’s anti-corruption drive, which has deterred the purchase of big-ticket items as bribes.
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In the industrial hub of Foshan, south of the provincial capital Guangzhou, many upmarket restaurants have closed. A woman who used to manage one such outlet blamed the anti-corruption campaign that has been a signature of Xi’s rule since 2012.
“When officials came to our restaurant they always spent at least 5,000 yuan and we gave them invoices for double that,” she said, “but after the corruption campaign I didn’t see any customers like that.”
An official at the government office for small and medium-sized enterprises said about 30% of manufacturing firms in the sector have shut.
A key issue for China is the economy’s dependence on exports for growth. When overseas demand is hindered by economic lethargy in big markets, companies feel the pain. In Guangzhou, economist Shao Feng said: “Guangdong has more than 30,000 toy factories, but most of their product is for export and therefore any trouble in foreign markets affects them and when demand is depressed they go bust.”
THERE is little danger that China will fall into recession. But the slowing of growth has profound ramifications for the global economy.
Falling commodity prices are just one aspect. The devaluation of the Chinese currency adds a further deflationary twist to prices in importing countries. That, combined with the market turmoil triggered by China’s woes, has dampened expectations that the US Federal Reserve will increase interest rates next month. The likely timing of an increase in Britain’s rates has shifted towards late 2016.
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Mario Draghi, president of the European Central Bank, will reiterate this week that it has plenty of scope to keep monetary policy loose.
The China slowdown is hurting companies trying to cash in on once-booming demand from the republic’s burgeoning middle class.
China accounts for fully one quarter of the global market for luxury goods. Companies such as fashion favourite Prada have already reported that sales to the country have plunged in the wake of the government’s crackdown on corruption: less corruption means fewer flashy gifts.
How important is China to Britain? Some 8% of British imports come from the People’s Republic. In terms of exports, China doesn’t figure in the UK’s top five markets — although British factories export components, which then go into finished goods sold to China.
Not everything is bleak. House prices in China have risen — even as stock markets have tanked. Consumers are spending more. Nevertheless, some loss-making factories are being kept open only because they are propped up by state-owned banks that want to maintain social stability. Elsewhere, closures and redundancies are sparking unrest. Strikes are becoming more commonplace — and less easy to crush. One Taiwanese manager in Dongguan said: “The political advantage of manufacturing on the mainland has gone. The new generations of workers have a strong sense of their rights.”
A policeman added: “A few years ago, people had to get together to plan a strike, so you could round them up. Now, they all have smartphones, so organisers just send messages.”