Losses Grow as China's Economy Weakens

Premier Wen may be "full of confidence," but another rate cut, disappointing earnings, and struggling manufacturers tell a different story

By Bruce Einhorn

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Give Chinese Premier Wen Jiabao credit for looking on the bright side. Visiting Moscow on Oct. 28 for a summit with Russian Prime Minister Vladimir Putin, the Chinese leader opened a conference on Sino-Russian cooperation by trying to dispel any doubts about the health of China's economy. Conceding the global credit crunch has "caused a certain degree of impact," Wen nonetheless said: "We are full of confidence in China's economic development and financial stability."

Closer to home, though, others are less sanguine. On Oct. 29 the Peoples Bank of China cut interest rates by 27 basis points, with its benchmark one-year lending rate now at 6.66%. That's the third cut in six weeks. The announcement comes as some of the country's largest companies report disappointing earnings. The same day Wen spoke in Moscow, insurance giants China Life and Ping An were reporting big hits to quarterly earnings. Profits slumped 70%, to $341 million, for China Life, the largest insurere in the country. Ping An, the second-largest, reported a loss of $1.1 billion. And China Pacific, the country's third-largest insurer, said it suffered a $234 million quarterly loss and announced it was canceling a proposed initial public offering in Hong Kong.

The credit crunch and global downturn are troubling companies in the manufacturing sector, too, especially in southern China's Pearl River Delta, the region in Guangdong province that is a vital part of the Chinese export machine. There, 70,000 Hong Kong-owned manufacturers employ 10 million people. However, the Hong Kong Federation of Industry warns 25% of those companies will soon be going out of business.

Trouble in Guangdong

Even before the global crisis intensified in September, labor-intensive factories in the Delta were feeling the heat from rising wages and increased regulation. Now they're getting hammered by falling demand and tighter credit, says Stanley Lau, deputy chairman of the federation and managing director of Renley Watch Group, a privately held manufacturer that employs 400 workers in the Pearl River Delta city of Dongguan. While Lau says his company is healthy, many other factory owners have had their credit lines slashed by up to 50% by their banks.

And those are the lucky ones. "Some of the foreign banks have called in the loans and finished the relationship with the companies because they need the money," says Lau, who anticipates "many more" Hong Kong-owned companies in Guangdong will close next year. "With all these negative issues, how can the manufacturers stay well?" he asks.

A lot is riding on the answer, for China as well as for the rest of the world. With the U.S., Europe, and Japan facing severe recessions, China could be a rare bright spot in the global economy, thanks to its growing middle class, big inflows of foreign investment, and years of strong growth. Neighbors like Japan, South Korea, and Taiwan are big exporters to China and need a Chinese lift to help compensate for falling demand in the West. So, too, are resources companies such as Anglo-Australian giants BHP Billiton and Rio Tinto. Automakers such as GM (GM), Ford (F), and Toyota (TM) have made big investments in China in the hopes of cashing in on rising demand from the growing Chinese middle class.