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Reality bites at economic powerhouse
By Wang Zhenghua (China Daily)
Updated: 2009-01-19 07:44

Reality bites at economic powerhouse

Good swimmers at length are drowned, goes a Chinese saying.

That seems the predicament of Yangtze River Delta region, the nation's economic warhorse amid the global economic meltdown.

Consisting of Shanghai and the two neighboring provinces of Jiangsu and Zhejiang, the region bears the brunt of the slowing export growth and the global investment freeze.

A number of key indices indicate that the region's economy, which ballooned to 5.6 trillion yuan, or 22 percent of the nation's total GDP in 2007, is slowly losing steam. For instance, there have been reports that the industrial sector profit in the region fell nearly 44 percent between January and September last year.

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Yangtze River Delta relies mostly on foreign trade and its economy would feel the negative impact of the crisis, said Yu Hongsheng, researcher, Shanghai Academy of Social Sciences. Growth in traditional manufacturing sector has also slowed down.

"The region has a lot of foreign trade companies. For a long time these enterprises concentrated on the US and EU markets. But now these markets have shrunk," said Huang Renwei, deputy director, Shanghai Academy of Social Sciences.

In Shanghai, a key driver of the region, the economy that has maintained a much higher growth rate than the nation's average for the last 16 years slowed last year. GDP growth in 2008 was estimated at 10 percent, down from 12.7 percent in the previous year. The target for GDP growth is 9 percent this year, and the government plans to keep the jobless rate under 4.5 percent.

"We are seeing negative growth in fiscal revenue, industrial output and exports, and there is increasing pressure on employment," said Shanghai Mayor Han Zheng.

The two resilient co-drivers of Zhejiang and Jiangsu also reported sluggish growth.

Reality bites at economic powerhouse

Take the case of Wenzhou in Zhejiang. Over 8 percent of the shoes manufactured in the world comes from Wenzhou, while in the case of metal lighters the city has a global market share of 90 percent.

But in such an economy where private sector takes the lion's share in GDP growth, the global downturn is already making deep inroads.

According to an official survey on 18,000 Wenzhou enterprises in September, 1,460 of them, or 8 percent, have ceased production while 304, or 1.6 percent, have gone bankrupt. Both figures are expected to rise sharply as the nation's economy retreats further.

Exports are plummeting while loan defaults of overseas buyers are also rising. "Approximately 30 percent of the foreign trade companies have seen a fall in exports," the city's Vice Mayor Chen Hongfeng told China Business Weekly.

Loan defaults surged 91 percent year-on-year to $2.1 million in the first three quarters, with 70 percent of the arrears due from the US and EU companies.

Small and medium-sized enterprises (SMEs) in the region, once a dynamic sector, spent a particularly dramatic year amid shrinking overseas orders coupled with rising labor and land costs.

Di Na, deputy director general of SME department at Ministry of Industry and Information Technology, said small companies in the Yangtze River Delta as well as in Pearl River Delta regions were hit especially hard because many of them are export-oriented, labor-intensive and engaged in traditional processing businesses.

"For these reasons, the rigorous economic situation this year hit SMEs in Yangtze and Pearl rivers delta regions," the official said.

Government actions

The Shanghai municipal government has said it would launch a 160-billion-yuan economic stimulus package, following the central government's call to boost the economy by increasing investment. The spending over the next two years would focus on areas such as transportation, scientific innovation, industry upgradation, environmental protection and projects related to the 2010 Shanghai World Expo.

Earlier, the city's urban construction and communications bureau rolled out plans to spend 500 billion yuan over the next several years on a wide range of infrastructure projects, including the improvement of affordable and low-rent housing, building programs in the suburbs, construction of an international shipping center and investments in urban transportation facilities.

"It's really hard times for Shanghai, but a string of policies and measures will help business and boost consumption," Han said at the opening of the annual meeting of the municipal people's congress last week.

Jiangsu, on its part, is slated to spend 300 billion yuan by the end of this year and another 650 billion yuan in 2010 to boost domestic demand. In the initial injection, about 80 billion yuan, will be spent on improving people's livelihoods and environment, including building 6,000-km roads in rural areas and a comprehensive managementproject around Taihu Lake.

The other 220 billion yuan will be used on infrastructure construction and supporting enterprises. Among these are the Beijing-Shanghai high-speed rail, a city-bound rail connecting Nanjing and Shanghai, the Taizhou bridge and the Lianyungang Port. Funds would also be used for setting up 100 major independent innovative industrial projects and 100 large-sized enterprises with independently-developed intellectual properties .

With similar spending plans, Zhejiang governor Lu Zushan says the province will handle the "greatest challenge ever" with measures in foreign trade, investment and consumption.

That means the government will support export of competitive labor-intensive products in light textile sector and big-sized mechanics and equipments with self-developed brand and core technology.

Brand power

Entrepreneurs say that in lean times, brand reputation and product quality are the vital cogs that would help in combating the shrinking demand for products.

Kangnai Group, China's largest shoemaker, says it plans to concentrate its business on mid- to high-end market in what it terms as a tough year ahead, after the slowdown dented its sales volume by 5 percent last year

"Our brand and a steady market would help offset the financial crisis," says Zhou Jinmiao, executive vice general manager of the Wenzhou-based company.

A forerunner of the 2,700 shoemakers in Wenzhou, Kangnai carefully built its brand through its 2,600 chain shops in the country and 200 overseas stores. The shoemaker with a track record of over 28 years employs 4,000 people and achieved a sales income of 2 billion yuan in 2007.

With 10 percent of its sales from overseas markets, the shoemaker could not afford to sit back and watch the crisis unfold, said Zhou.

The company started the process of introspection in 2007 when it hired a prestigious consulting firm to re-analyze its growth strategy, and decided to remain focused on the footwear industry rather than diversify into industries they were not familiar with.

"Consumers can never give up shoes. In lean times, winners are those who produce merchandise that fit the needs of customers and market," said Zhou.

To have a greater say in customer choice, the company expanded its designing team with professionals from Italy and Spain. Other efforts included further investment in technological innovation and eliciting suggestions from frontline workers for process improvement.

Zhou said Kangnai's sales in France surged 35 percent in November, whereas many overseas shoe biggies were forced to cut prices by nearly 30 percent.

"Products made in China have a price advantage," Zhou said. Kangnai sells it shoes for 70 euros a pair, compared with 200 to 300 euros charged by overseas manufacturers.

Other big players in the region say they will stick to their major business and inject more funds for R&D and technology innovation. It's the proper time to enhance the company's management, said Xu Lejiang, president of China's biggest steel maker Baosteel.

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