The Red Dragon starts to run out of puff

Workers gather outside a large toy factory that closed in Zhang Mu Tou of Guangdong province.

The industrial dragon is starting to splutter and it will take more than an army of feng shui masters to calm the winds of recession that threaten to spread to China from the West. In the space of a month, the fastest-growing major economy in the world has started to show signs of financial storm damage, with reports suggesting that manufacturing is slowing and warnings of tough times ahead from the country's leaders. Even the forces of nature are conspiring to stall China's economic juggernaut. "Most feng shui masters felt that it was going to be a turbulent time," said Dr Jin Peh, a feng shui expert now living in Dubai. "China is represented by the earth element as it is considered the centre of the world. Thus, it performed extremely well this year as it is the year of the Yang Earth Rat. Yang Earth governs the first half of the [Chinese] year, and the animal sign, the Rat, governs the second half of the year. As can be seen, China did extremely well with regard to the Olympics, which was held in the first half [of the lunar year]. In the second half, the rat is governed by the element of water, thus only water countries, such as the Scandinavian nations, will be insulated from what is happening."

From geomancy charts to bar charts, the omens are ominous. Just 10 days ago, the Chinese premier, Wen Jiabao, sounded a cautious note when he admitted that problems at home would take precedence as countries in the West reel from the worldwide crisis that has wiped US$5 trillion (Dh18.36 trillion) off global markets. "Against the current international financial and economic turmoil, we must give even greater priority to maintaining our country's steady and relatively fast economic development," he said in the Communist Party's ideological journal, Seeking Truth. "We must be crystal clear that without a certain pace of economic growth there will be difficulties with employment... and factors damaging to social stability will grow." The seeds for rising unemployment appear to have already been sown in certain areas of the manufacturing industry. Statistics supplied by China's Xinhua News Agency revealed that about 3,900 toy exporters, or 52 per cent of the sector's companies, have shut down this year due to higher production costs, rising wages and the global slowdown. The "for sale" signs are starting to appear in what was known as "Santa's workshop", and this year's Christmas season is unlikely to bring festive cheer to the thousands of workers who have already been laid off. "The financial crisis in America is going to kill us," said Wang Wenming, who worked for the Smart Union Group. Mr Wang was employed as a labourer in a factory in the city of Dongguan in Guangdong province, just north of Hong Kong.

Toys for household names such as Mattel and Hasbro used to roll off the assembly lines, but last month they were closed down, the factory gates were padlocked and 7,000 lost their jobs. "It's scary," said Zeng Yangwen, an engineer who was employed by Smart Union for three years. "The companies that folded before were small. This is the first big one to go." It is unlikely to be the last factory to bring down the shutters. According to Xiao Yong, who works for a company that sells Christmas trees and gifts, orders are 50 per cent down on last year's level. "Many toy makers in Dongguan rely too much on orders from the US and Europe," he told the China Daily. "The financial crisis has led directly to a reduction in orders." Like other manufacturing workers in Guangdong, Mr Xiao fears for his future. Most of China's toy factories were set up in the province more than 20 years ago as the then paramount leader Deng Xiaoping called on the country to embrace capitalism and move away from Communist-controlled state industries. Companies from Hong Kong, Taiwan, the US and Europe flooded into the region to set up low-cost factories that turned out everything from laptops and lingerie to iPods and irons. Nestling on the border with Hong Kong and radiating out from the city of Shenzhen, the region quickly became known as the Pearl River Delta. Now the river of growth is starting to dry up. Latest estimates suggest about 68,000 small companies have collapsed across China while 2.5 million jobs in the Pearl River Delta could be lost by the end of this year. "Of course, due to the upturn of economic turbulence outside China, there is a slowdown in our growth rate, but I think the growth of China's economy will still be at 9 per cent," Zhang Ping, the chairman of the National Development and Reform Commission, said last month. For a country that has posted double-digit growth figures for the past decade, 9 per cent means that China's economic engine is barely ticking over. Last year, the annual growth rate was 11.9 per cent, but that has slowed to 9.9 per cent in the first three quarters of this year, with economists predicting it could dip further. "With growth now clearly on a slowing path, we expect the government to roll out a combination of fiscal, monetary and sector measures to mitigate the external shock and help to keep growth from falling sharply," said Wang Tao, an economist with UBS. To illustrate the nation's reversal of fortune, three months ago the country was basking in the afterglow of the Olympics. In the space of 30 years, this patchwork nation of distinct provinces and cultures had come of age on the international stage. Beijing was suddenly a showcase for 21st century China, where everything seemed possible. "I think the Games have been a stunning success in terms of its international image," David Shambaugh, the director of the China Policy Programme at George Washington University, said in August. "This is going to earn China considerable international respect." Since then, dark clouds have gathered on the economic horizon and those awe-inspiring Olympic days seem a distant memory. Visions of unparalleled progress have been replaced by hard-nosed pragmatism. In a move to keep the nation growing, economists expect the government to dramatically boost spending on infrastructure projects such as roads and major city developments after cutting interest rates and handing out tax rebates to exporters. "The single important policy goal is growth, and the government will rapidly roll out fiscal, credit and trade policies to achieve this goal," Merrill Lynch said in a report released late last month. Last month's disappointing manufacturing figures finally forced the leadership to unveil a 4 trillion Chinese yuan (Dh2.15 trillion) package last week to stimulate the economy. "It's a significant guarantee to growth," said Louis Kuijs, an economist at the World Bank in Beijing. "China can boost spending and provide a cushion to growth domestically and to all of its trading partners."

The move came after China's Purchasing Managers' Index dropped to a seasonally adjusted 44.6 per cent last month from 51.2 per cent in September. That was the lowest level since this gauge to manufacturing was launched in the summer of 2005. "The government needed effective stimulus measures to spur growth," said Wang Qian, an economist with JP Morgan Chase in Hong Kong. "The external economic outlook is worsening rapidly." Back in July, manufacturing contracted for the first time since the survey began. Add that to slowing growth and falling property prices, up to 40 per cent in cities such as Shenzhen, the alarm bells were starting to ring in Beijing's Great Hall of the People. They were probably triggered after one senior banker warned that the global recession would have a massive impact on China's economy. At a financial conference in the country's capitalist citadel of Shanghai, the vice president of the Bank of China, Zhu Mi, spelt out the hard facts of economic life. "Next year, the global economy is very likely to enter recession and the world's biggest economies, including the US, Europe and Japan, are very likely to post negative growth and that will have a huge impact on China," he said last week. Mr Zhu was speaking from experience. Last month, the Bank of China reported that profit growth slowed to 12 per cent in the third quarter from 43 per cent in the first six months. The country's flagship foreign-exchange lender had $6.2bn worth of debt issued by struggling US mortgage companies Freddie Mac and Fannie May by the end of September, and was carrying $3.3bn of subprime-related securities. "The impact of the crisis on China has just started to appear as China has already seen a sharp slowdown in industrial profit growth and fiscal income," Mr Zhu said. "The financial crisis will technically precede economic turmoil by eight to 12 months." This tougher business environment has even claimed victims among the country's new rich. The industrial masters of the new Middle Kingdom have lost 57 per cent of their wealth in the past year thanks to plummeting stocks, falling property prices and currency fluctuations, according to Forbes Asia. The magazine revealed that the country's 40 richest tycoons were worth $52bn, before reporting that at least half of those on the list last year had dropped out after their personal wealth had shrivelled.

Yang Huiyan, the property heiress, slipped to third place behind Liu Yongxing, who owns animal-feed plants and aluminium smelting mills, and Huang Guangyu, the head of Gome Electrical Appliances. The cooling property market, coupled with the plunge in the Shanghai Composite Index (SCI), saw Ms Yang's personal fortune shrink by $14bn to $2.2bn. During the past year, the SCI has lost more than 60 per cent, with property stocks bearing the brunt of a volatile market. "Property has led the downturn as the government tightened credit to counter a bubble and prices have started to fall," said Russell Flannery, a Forbes senior editor who helped compile the list. A clearer picture of what is in store for China in the months ahead might be found in Hong Kong, the long-time gateway to the mainland and now a special administration zone after being handed back by Britain in 1997. The Hang Seng Index has plunged 58 per cent this year while shop rents are down by more than 10 per cent from their peak. "This is only the beginning," said Pierre Wong, the chief executive of the property agents Midland IC&I. "Many retailers are only hanging on because we're going into the peak shopping season of Christmas and Lunar New Year. If banks don't start lending money again, a lot of retailers are going to go down." Hong Kong has seen all this before. The city bounced back from the double whammy of the Asian financial crisis and bird flu in 1997, and recovered from the Sars outbreak in 2003. Even so, it is preparing for the worst after setting up a special task force of politicians and businessmen to tackle the aftershocks from the global turmoil. "The challenges ahead of us are daunting," said Donald Tsang, the chief executive or leader of the city's legislature. "The damage that the financial tsunami has inflicted on the global economy has yet to be fully revealed." China, the red dragon, should have enough greenbacks to cushion a fall with $1.9 trillion in foreign reserves. But there will be casualties along the way as companies are stretched to the limit in the next six months. "It is difficult to see where a recovery in demand will come from in the short-term, given the negative outlook for exports, property, investment and it seems now increasingly consumption generally," said Stephen Green, an economist with Standard Chartered Bank in Shanghai. In the meantime, the road for China in the next two years is forecast to be difficult. "The word among the community is that next year will be a quiet one," said Dr Peh, who specialises in residential and commercial property feng shui. "Maybe things may pick up in 2010. But personally, I think that things might even dip." * with agencies [e-mail]