Daily Israel Report

Money Tightening, Reduced Demand and Competition Hit China

China's production has contracted, diminishing hopes that China can play the economic locomotive
By Amiel Ungar
First Publish: 9/23/2011, 1:16 AM

With the European Union and the United States facing economic woes, the Chinese Dragon was the great hope for pulling the global economy out of the mud.

This hope is belied by the China manufacturing index, released by HSBC Holdings, showing that China's manufacturing contracted for the 3rd straight month --the longest downturn since 2009.

This is a result of higher interest costs and lending restrictions meant to curb inflation and batten down the hatches in the event of another US recession and the aggravation of the European debt crisis.

The Chinese slowdown is also a product of the economic downturn in the developed world that translates into reduced demand for Chinese goods.

Another factor depressing Chinese production figures is increasing competition from Southeast Asian countries in the low-end of the market. Bangladesh has made inroads into the textile market, while Indonesia and Vietnam have done the same in footwear.

The Chinese government is trying to narrow income gaps and has raised the minimum wage by 13%. Additionally, industries in China are having a harder time recruiting workers from inland areas to the coastal areas, where most of China's export industry is concentrated, and they must offer higher wages which raise costs.

China, following in the footsteps of Japan and South Korea, is trying to move up the chain and believes that it can ward off its low-price competitors, who, it hopes, will prove unable to match China in skills and productivity.

This may be the case, but China will not be the first country to console itself with the notion that its competitors will not be able to match its success.

The Germans once believed that the Japanese would never compete with their cameras and optics. Japan displayed the same condescension to South Korea and China.

What this goes to show is that China has no magical formula that makes it immune to economic realities.