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China’s manufacturing industry expects an explosion in factory closings this year and the first wave is hitting now.
Citizen closed a watch factory ahead of Spring Festival, affecting 1,000 workers.
Most of the workers at a well-known Japanese company in Guangzhou, Guangdong province, that shut down last week have signed contracts to leave the company of their own accord after mediation from local labor department and trade unions by Monday noon.
A recent case in point is the decision of Citizen China, which produces Japanese Citizen watches, to fold its production base in Guangzhou, on the heels of Microsoft which announced on Dec. 17 its decision to close the mobile-phone factories of Nokia, under its auspices, in Beijing and Dongguan by the Spring Festival moving facilities to Nokia’s factory in Hanoi.
A number of other foreign enterprises are scheduled to join the exodus this year, including Panasonic, Sharp, Daikin, and TDK, all Japanese firms, which plan to transfer some capacity from China back to Japan or to other countries. Others, such as Uniqlo, Nike, Foxconn, Funai, Clarion, and Samsung, are setting up new factories in Southeast Asia and India, while scaling down their Chinese operations.
Notably, Japanese companies are moving back to Japan, in part due to the cheaper yen and perhaps expectations of further weakness in the yen. China, on the other hand, is squeezing its low cost manufacturers with a stronger yuan.
Hundreds of factories have shut or ceased operations in Dongguan ahead of the holiday and Wenzhou’s industry is fading:
Industry insiders estimate that there are more than 100 large scale factories closing before the Spring Festival, in Dongguan hundreds of large factories closed down or stop operations. Furthermore, known manufacturing capital, to manufacture glasses, shoes, lighters the world famous Wenzhou, the manufacturing industry is currently experiencing a hollowing out, shoes, lighters and other industries, their one proud aura is gradually fading.
Surveys from China showed manufacturing struggling at the start of 2015 in the world's second biggest economy.
The Chinese HSBC/Markit PMI inched up a fraction to 49.7. But of more concern the official PMI, which is biased towards large factories, unexpectedly showed activity shrank for the first time in nearly 2-1/2 years. The reading of 49.8 in January was down from December's 50.1 and missed a median forecast of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles.
Ordinarily, cheaper energy prices would be good for China, one of the world's most intensive energy consumers, but many economists believe the phenomenon is a net negative for Chinese firms because of its impact on demand.
The PMIs only fuelled bets on a weaker yuan and that more monetary easing was in store in Beijing too.
"China still needs decent growth to add 100 million new jobs this year, plus China is entering a rapid disinflation process," ANZ economists said in a note to clients.
"We (think) the People's Bank of China will cut the reserve requirement ratio by 50 basis points and cut the deposit rate by 25 basis points in the first quarter."
Slightly better news came from Japan, where the central bank has been pursuing an aggressive bond-buying campaign for over a year in a bid to revive growth and shake the country out of decades of deflation.
China has long accepted its role as the lowest cost producer which attract high amounts of foreign direct investment from global market, exploiting their factor endowment of excess labour, however this was always going to be a transient situation; while multinational firms just want to identify and exploit the lowest marginal cost producer, regardless of where this may be from, so if China is no longer the cost leader, the viability for China to maintain current favorable position is no doubt one of the biggest questions.