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February 26th, 2008:

Rising Costs Close China Factories

Mei Fong, Beijing and Sky Canaves, Hong Kong | February 26, 2008 – The Australian Business

CHINA’S Pearl River Delta – the southern coastal area that in the past two decades has become the world’s factory floor for low-end goods — is losing thousands of factories.

Rising costs and tighter regulations are making the region less competitive than other Asian manufacturing hubs, including other parts of China.

New labour laws and higher taxes for foreign-invested companies, combined with tougher environmental rules and a strengthening Chinese currency, are squeezing Chinese companies that make labor-intensive products such as toys, clothing and furniture.

This year “will likely mark the year (China) manufacturers were finally forced to take a general hit on profitability”, UBS economist Jonathan Anderson said in a note.

The Federation of Hong Kong Industries estimates 10 per cent of the 60,000 to 70,000 Hong Kong-owned factories in the delta region will close this year – likely the highest rate of closures in 20 years, deputy chairman Stanley Lau says.

Some of these operations have been closed for good, some moved inland, and some relocated outside China.

In the past year, more than 1000 shoe factories and related suppliers have closed in Guangdong, which is home to the Pearl River Delta and which has provided about a third of China’s exports. That is roughly 10 per cent of the footwear manufacturers in the province, says Li Peng, secretary-general of the Asia Footwear Association.

Most companies shutting factories had relatively small operations in Guangdong province, having invested less than $US3million ($3.25 million) each, according to a survey by the International Business Daily, a Chinese newspaper.

Douglas Sheridan, president of Hong Kong-based sportswear supplier Net69, says it is “the first time I’ve seen so many elements hitting us at once” in China. At a recent trade fair in Munich, “everyone was talking about who they are working with in south China, and whether they’ll still be in business”, says the 25-year industry veteran, who is now setting up a joint venture in Vietnam and scouting other locations outside China.

The changes buffeting low-end manufacturers are likely to be long-lasting. They are driven in part by the Chinese Government’s effort to redress some of the imbalances brought about by decades of breakneck growth, such as poor working conditions and pollution.

Beijing also changed its corporate-tax rates this year to phase out tax breaks given to foreign companies, which dominate the export sector. And rising prices for oil and other commodities have added to the pain, as has China’s strengthening yuan, which gained nearly 7 per cent last year against the dollar, making Chinese goods more expensive for buyers in the US.

“This year is a turning point for manufacturers,” said FC Lo, vice-president of the Chinese Manufacturers Association of Hong Kong, where many of the companies that manufacture in southern China are based. In years past, “many made money” he says, but “things have changed”.

The shift in China’s light-manufacturing sector is sending ripples around the world. Factory owners are looking beyond Guangdong and the Delta – where the cost of living, and hence, wages, has become relatively high – to new locations deeper inside China, where they can enjoy lower costs and investment incentives from local governments eager to attract businesses.

In some cases, they are also turning to poorer countries with lower wage levels. That means new investment and assembly-line jobs in countries such as Vietnam and Bangladesh – and possibly longer, more-complex supply chains for big buyers such as Wal-Mart.

Those changes are being driven by fierce pressure to keep prices low for overseas buyers. Prices for Chinese exports have already been rising at a quickened pace in recent years, and the new increases in labor and other costs could translate into even more expensive products for consumers and companies in the US and Europe – just as economists are worried about a possible recession in the US.

China retains a number of advantages in manufacturing that mean the broader impact is likely to be limited. The current pain is concentrated among producers of inexpensive, labor-intensive goods, whereas the majority of China’s exports now are machinery and electronics – goods such as auto parts or computers.

Beijing has encouraged manufacturers to switch to such higher-value goods, in which labour costs are less of a driving factor and China’s economies of scale make it a formidable competitor. China also boasts roads and other infrastructure that are superior to many other developing countries.

Those factors mean China will remain a force in global manufacturing for years, even if its traditional advantages in light manufacturing along the coast erode.

Perhaps the biggest catalyst behind the shifting climate for light manufacturers is a labour-contract law that took effect on January 1. Employers say the law has shifted bargaining power in favour of employees and raised awareness of rights among workers. A labour shortage in southern China – as workers find more jobs in other parts of China – has also given workers more clout.

“The biggest worry is not (the possible US) recession, which is cyclical,” says Willie Fung, chairman of brassiere manufacturer Top Form. Instead, he says, it is the “one way” changes in China’s operating environment. “Costs, once jacked up, cannot go down,” he says.

The changes are affecting low-end producers in other coastal parts of China, too. But the area hardest hit is the Pearl River Delta. During the two decades when investments poured in from Hong Kong and Taiwan, the area blossomed into a manufacturing juggernaut, responsible for about 8 per cent of the country’s gross domestic product as of 2006.

Today, parts of the area around Dongguan, a major manufacturing hub in the delta, are now full of “empty restaurants, factories closed down”, says Willy Lin, who heads a knitwear-manufacturing business.

Mr Lin’s company, Milos Manufacturing, is moving its factory to Jiangxi province, about six hours by car from Hong Kong. But he is worried about finding skilled workers. “We need nimble fingers, but we’re worried we find farmers who … can’t work my machines.”

Additional reporting: Ellen Zhu in Shanghai

Rich Countries Must Bear Cost Of Reducing Carbon Emissions

British foreign secretary: Rich Countries Must Bear Cost Of Reducing Carbon Emissions

The Associated Press – Published: February 26, 2008

SHANGHAI, China: Rich industrialized nations must help the developing world pay for a shift to cleaner technologies to fight climate change, British Foreign Secretary David Miliband said Tuesday during a visit to China’s financial center.

Major developing nations such as China and India will face a devastating “boomerang effect” of devastating effects from global warming such as drought and crop disruptions if they do not opt for cleaner, less polluting economic development, Miliband told students at the China-Europe International Business School.

Adapting energy technologies that emit fewer of the greenhouse gases viewed as a main contributor to climate change “does not sacrifice development but … it is much more expensive than high-carbon development,” he said.

“The question is, who pays for it?” Miliband said. “The richer countries have got to lead in taking the burden of paying for the shift to a lower-carbon economy.”

Scientists believe carbon dioxide is one of the leading contributors to global warming.

China, which chiefly relies on heavily polluting coal to fuel its surging economy, now rivals the United States as the world’s largest emitter of greenhouse gases.

Britain backs calls for industrialized countries to help the developing world cope with the consequences of centuries of pollution by the West.

Last month, British Prime Minister Gordon Brown pledged about 50 million pounds (US$98.3 million; €66.3 million) to support investment in energy efficiency, renewable energy, clean coal and carbon dioxide capture-and-storage technology during his first state visit to China.

China has pledged to improve energy efficiency, while insisting on its right to pursue the economic growth needed to supply jobs to its 1.3 billion people.

For the poorest countries, the focus should be on promoting sustainable development, Miliband said.

“Their aid programs have got to be ‘greened,'” he said.

Miliband was to travel to the southwestern industrial hub of Chongqing before heading to Beijing later in the week.

During a stopover in Hong Kong, he said Monday that he would discuss the issue of Sudan with his Chinese counterparts, but added that Beijing alone should not be held responsible for trying to end the conflict there.

“We all have our responsibility to use our weight in the country and in the international arena to argue for dialogue, for responsibilities on both sides.”

Kuwait-China $5b Refinery Under Serious Evaluation

Kuwait News Agency (KUNA) – 26/02/2008

(MENAFN – Kuwait News Agency (KUNA) The petrochemical project of the state-run Kuwait Petroleum Corp. (KPC) and China Petroleum and Chemical Corp’s (Sinopec) in southern China, worth USD five billion, is still under serious evaluation by environmental authorities, official media reported in Beijing Tuesday.

“The massive petrochemical base planned for construction in Guangzhou’s Nansha district will be less polluting than people believe and is still under the State’s environmental assessment,” Liu Jianwei, deputy director of the Nansha district government, was quoted by the China Daily as saying.
Liu did not disclose when the project was scheduled to commence building, according to the daily.

The Sinopec-Kuwait oil refinery and chemical project, with a planned investment of USD five billion, will be the largest joint venture in China.
Kuwait Petroleum International (KPI), the international refining and market arm of KPC, has formed the joint venture with China’s biggest oil refiner Sinopec Corp. to construct the integrated complex.

The refinery will be designed to process 100 percent Kuwaiti crude supplied by KPC, with a capacity of 13 million tons per year, or 260,000 barrels per day (bpd), while the ethylene cracker unit is slated to have an annual production capacity of one million tons. The KPI-led consortium also includes Kuwait Petrochemicals Company (PIC) and foreign partners such as Dow Chemical Co. of the US.

“The plant in the provincial capital of Guangdong will recycle all its raw materials, adhere to the most stringent global environmental standards and employ state-of-the-art technologies,” he said.

Liu was responding to a proposal jointly submitted recently by 14 legislators to the Guangdong provincial people’s congress. Legislators submitted a proposal for the Nansha petrochemical project, which approved by the central government in December, to be delayed.

“The project should not have been listed as one of this year’s key projects of Guangzhou and Guangdong as the central government had not yet completed an environmental evaluation on the base,” they said.

Liu Yiling, director of the Guangdong environmental protection technological center, said the project violates the environmental protection guideline, which designates Nansha as an area not suitable for large oil refinery, iron and steel projects.

“The Nansha plant would worsen air pollution problems in Guangzhou, she said, stressing that it will have adverse impact on the air quality of cities including Hong Kong and Shenzhen.