China Economy: The Collapse of Manufacturing and the Baltic Dry Index (BDI)
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Shanghai, 23 Feb 2009. In the summer of 2008, with trade and inflation both rampant, it cost on average $1,400 to transport a container from Asia to Europe. By January 2009, the price from China to Europe had collapsed to $0, excluding fuel and handling.
The Baltic Dry Index, and exchange that averages the price of moving good across sea, tells a similar story. After hitting a high of around 11,650, the index dropped to 65 by Dec. The index has risen back above 2,000 in February 2009, but for many shipping companies it might be too late.
The collapsing in shipping and air cargo reflect a deeper problem; manufacturing orders fell off a cliff as the financial crisis took hold in October 2008, and are perhaps the most visible sign of the dire straits that the real economy now finds itself in.
America’s car production has dropped a staggering 60 per cent year on year, Germany’s machine-tools order have dropped by 40 per cent, and Taiwan’s notebook computer exports are down over 30 per cent.
Official figures say that China’s exports declined 17.5 per cent year-on-year. That is likely to be an underestimation of the decline, but even that low figure represents 10 per cent of China’s GDP and tens of millions of jobs.
Half of the over 9,000 toy exporters in Southern China have closed shop, and similar trends are being seen across all manufacturing industries, with thousands of factories now closed down. Not only is external demand down, but firms are running down their inventories, and in China some of these stockpiles were built up as a hedge from before the Beijing Olympics.
A case in point is Hon Hai, a massive – and secretive – Taiwanese manufacturer, that opened a factory in Shenzhen in 1988 that become a virtual city employing 260,000 people. Reports in Taiwan suggest that number has been cut to 100,000.
There are other anecdotal reports, however, suggesting that even in the belly of the fiercest contraction that modern China has experienced, stronger suppliers are expanding and entrepreneurs are forming new companies to plug gaps vacated by the newly deceased.
Chinese authorities are very fearful of the social consequences of millions of unemployed and disgruntled migrant workers, some of who did not receive their last salary checks. They are looking now to use some of their reserves to boost domestic spending and infrastructure development, with a greater share of that going to inland regions and reducing the need for massive influxes to the coastal urban areas.
They are also hoping that the entrepreneurs that survive this manufacturing winter will be even more resilient and competitive, and will start hiring workers again sooner rather than later.
Chen Xuilien, EconomyWatch.com
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