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‘It’s no good for China’s growth’

Chinese companies are bracing for tougher times as a U.S. slump cuts into sales to the all-important American markets, likely reducing China's own booming growth.
Image: pile of steel at an iron and steel mill yard in Hefei, China
From steel mills to travel agents, Chinese companies are feeling the pinch from the U.S. economic slowdown. This worker walks by the pile of steel at an iron and steel mill yard in Hefei, central China's Anhui.Str / AFP - Getty Images
/ Source: The Associated Press

Oyimay Sofa Co. is already feeling the pain of a looming U.S. economic slump.

Orders from skittish American retailers, who buy nearly two-thirds of Oyimay's output, are down 10 percent this month from the same time last year, said general manager Zhou Feng. He said the 1,000-employee company in China's export-driven southeast is scrambling to recover by switching to more appealing, profitable models but expects to see earnings slashed this year.

"We have felt the pinch of the U.S. economy," Zhou said.

From steel mills to travel agents, Chinese companies are bracing for tougher times as a U.S. slump cuts into sales to the all-important American markets, likely reducing China's own booming growth.

In Asia's other developing giant, India, the export-driven garment industry could suffer. But lower Indian reliance on foreign markets could limit the impact of a possible U.S. recession.

Curbing China's growth
Chinese companies are expected to respond to slower U.S. demand by trying to boost sales to Europe and domestic markets, while trade with other Asian economies could cushion the blow.

Economists have lowered growth forecasts for China due to the U.S. credit crisis. A drop of 1 percentage point in U.S. growth would shave 1.3 percentage points from China's growth rate, Citigroup says. Forecasts for 2008 growth now range from Standard Chartered's 9.5 percent to Citigroup's more optimistic 11 percent.

Lower export growth would ripple through the economy, hurting consumer spending and demand for steel and imports, which jumped 21 percent last year to a total of $791 billion. That could reduce China's potential to take up the slack from the United States as an engine of global growth.

China has been trying to reduce its reliance on exports. But still, its sales to the United States _ its No. 2 foreign market after the 27-nation European Union — rose 14 percent last year to $232.7 billion, accounting for 21 percent of total exports.

'It's no good for China's growth'
"If there is no growth in such demand, or it slows, then we will see that goods produced in China can't be sold," said Merrill Lynch economist Ting Lu. "It's no good for China's growth."

Neighboring countries could feel the blow as Chinese factories making goods for export buy fewer components abroad. China is South Korea's No. 1 foreign market, ahead of the United States, and a key customer for other Asian economies that supply raw materials or feed a growing Chinese consumer market.

An export slowdown could worsen what Chinese planners worry is an excess of production capacity in industries including textiles and auto manufacturing. They have been trying to curb investment in industries where supplies of assets exceed demand, but spending on factories and other fixed assets has been rising at an annual rate of 25 percent.

"An export-led slowdown would reveal the overcapacity," Lehman Brothers economist Mingchun Sun said in a report this week. He said that could leave companies with a backlog of goods and trigger a price-cutting war, "both of which would undermine firms' profitability and ability to repay bank loans."

China's boom and rising demand made it the second-biggest contributor to world growth last year after the United States, according to the International Monetary Fund. But analysts say China alone cannot replace the giant U.S. economy as the global engine.

"China, to some extent, can be a growth driver, but it cannot fill all the gap," Lu said.

In India, the economic impact of the U.S. slowdown is expected to be more muted due to the country's limited reliance on international markets.

Indian exports to the United States in the year ending last March were just $18.9 billion, or 15 percent of total foreign sales, according to government data.

"A U.S. slowdown won't hit us in a big way," said D.K. Joshi, principal economist for ratings agency CRISIL. "Our big advantage is that we have domestic purchasing power that provides a buffer against global turmoil."

Nevertheless, growing Indian export industries, including clothing, could be hurt.

Rajendra Hinduja, financial director of Gokaldas Exports, a major garment exporter, said foreign retailers report that sales of its clothes are down 4 percent to 5 percent.

‘U.S. recession’ impact
"The U.S. and EU are our main markets, so yes, a slowdown in the U.S. markets will definitely affect us," Hinduja said. "It's a little early to talk about it, but if retail is affected it will affect jobs and there will be layoffs."

Chinese companies are responding by trying to develop new products and to promote sales in Europe and other non-U.S. markets.

Exporters already are struggling with the rise of China's currency, the yuan, which has increased by 14 percent against the falling U.S. dollar since 2005. That has cut profits for producers of low-cost furniture, toys and other goods who employ millions of workers.

The Meisida Electronic Toys Co., in Jinjiang, a city in Fujian province in the southeast's export belt, is hearing complaints from U.S. customers about rising prices, said the company's foreign sales manager, Chen Junling. She said the company has 1,200 employees and exported 90 percent of its output last year.

"I have no idea exactly how much the U.S. recession will affect our business, but we may see purchasing volumes decline," Chen said. "We will develop new products to meet customer demand, but we are not going to cut the price."

In Beijing, China Odyssey Tours has seen a "very obvious" decline in American customers, said a marketing department employee who would give only her surname, Li. Odyssey is trying to attract more non-U.S. travelers and plans to increase promotions aimed at Americans, Li said.

"We don't plan to reduce the price, but we want to attract more rich Americans," she said. "After all, there are still many rich Americans."