China's Manufacturing worsening and Industrial Profits Fall

manufacturing in China

Predictions for China’s first quarter economic statistics gross domestic product (GDP) are around 6 percent growth, half of 2007’s 13 percent and smaller than 2008 fourth quarter numbers, but still better than many of China’s neighbors.  Profits fell for Chinese industry during January and February, to a net income of 219.1 billion yuan ($32 billion) — down 37.3% from the year-ago period, Bloomberg reported March 27. Manufacturing, which accounts for about 40% of China’s economy, has been battered by a collapse in exports and weaker Chinese consumer sales. China President Hu Jintao also told the country's Xinhua News Agency in an interview before leaving for the G-20 summit in London that the country’s economic problems are increasing.  ‘‘Currently, due to the impact of the international financial crisis and the clear decline in world economic growth, China’s economic difficulties are clearly increasing,’’ said President Hu.

It was the first decline since record-keeping began in February 2007; industrial profits had expanded 16.5% for January-February 2008. For state-owned companies, the decline was even worse: down 59.2% for the period.  Companies with foreign investment showed a 39.3% fall in profits, according to official statistics. Profits were down 86.1% for oil and gas exploration companies, 96.3% for the electronic and telecommunication sector, and 77% for power generators.

Government's Response to the Fall:

- China is trying to increase exports and avert more job losses by giving companies tax breaks and other aid.  The Chinese government also encourages companies to use more Chinese goods instead of imported products in industries such as textiles, steel and petrochemicals.

Since November 2008, Beijing has cut taxes on exporters, giving them room to reduce prices abroad on shoes, textiles, toys and other goods by up to 15%. It has repealed an export tax on steel and fertiliser. Steel, petrochemicals and other industries have been promised aid to improve technology and lift output. Authorities also scrapped a tax break on machinery imports by foreign-financed ventures to encourage factories and textile mills to switch to locally made equipment.

China's Ministry of Commerce says the government will grant subsidies worth 20 billion yuan ($2.9 billion) to stimulate electrical and electronic appliance sales in rural areas.  The plan was expected to encourage rural consumption of up to 150 billion yuan, reported China Daily.

- Beijing also has held down export prices by stopping the rise of its currency against the dollar in trading controlled by China’s central bank. The yuan is only traded in China, so the central bank can dictate the exchange rate because it allows only a small amount of yuan to change hands every day and can flood the market with dollars if demand rises too sharply.  The yuan increased in value by about 20% against the dollar between mid 2005 and mid-2008, but has been stable at about 6.85 to the dollar since September, 2008.

- The Chinese government has a target to reduce energy consumption per 10,000 yuan of GDP by 20% from 2006 to 2010.  Energy Consumption per unit of gross domestic product fell 4.5% last year as the Chinese government vowed to improve energy efficiency.  The fiugre was slightly higher than the National Beureau of Statistics' previous estimate of 4.21%; the figure in 2007 stood at 3.66%.

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