Saturday, August 25, 2007
China's gilded age coming to an end
Aug 21, 2007
By Kent Ewing，Asia Times Online
HONG KONG - China's gilded age of easy profits, cheap labor and unchecked environmental degradation may be coming to an end - at least for the tens of thousands of Hong Kong companies invested in the mainland's mammoth manufacturing industry.
Draconian new rules taking effect this week will force manufacturers to pay at least a 50% deposit on import levies, impose restrictions on exports, and also mandate the installation
of expensive anti-pollution technology.
The aim of the new regulations is clearly to reduce international tension over China's ballooning trade surplus, clean up the country's woefully deteriorating environment, and at the same time move its manufacturing industry up the value chain.
Hong Kong companies, which are invested in nearly half of the manufacturing done on the mainland, will be hit hardest by the changes, and they are mustering all of their resources to resist them. But the die is cast, and a new reality is about to begin.
In explaining the new rules, the Commerce Ministry's industry director, Wang Qinhua, said: "The new policy will add cost and affect the cash flow of exporters, especially those engaged in the labor-intensive part of the industry. Our calculation shows that the impact will force exporters to increase value to their products and upgrade their technology."
She added: "We hope these enterprises can follow the bigger situation and quicken their pace of adjusting their own product mix, increase their own intellectual-property rights, and develop the high end of their industry supply chain."
No doubt the central government hopes Wang's message was heard loud and clear in Washington, where Congress - up in arms over the slow appreciation of the Chinese currency, the yuan, and the ever-widening trade deficit with Beijing - has threatened to impose trade sanctions against China. But the new policy comes too suddenly for Hong Kong companies operating factories on the mainland. Crying foul, they are running to the Hong Kong government for help.
The regulations not only require manufacturers to install costly anti-pollution technology and add more than US$1 billion to the cost of their exports, but industry analysts say they could also tie up $2 billion to $3 billion in deposits that would otherwise be used for making more toys, electronics, clothing and other cheap goods.
Starting this Thursday, companies that import any of 1,853 different commodities - including plastics, metals and textiles - must pay at least a 50% deposit on their import taxes, and the number of commodities subject to this deposit is expected to expand to about 5,000 in the future.
The processing trade - in which Hong Kong companies play a particularly big role - will be hit the hardest, with analysts expecting a rise of 30% in export costs for such enterprises.
Of the more than 90,000 processing-trade firms operating on the mainland, China's National Bureau of Statistics reports, 57,500 are Hong Kong-invested. As these firms employ 9.6 million workers, the new policy will clearly involve layoffs. But Beijing is ready to accept that loss in exchange for moving up the value chain in manufacturing, cleaning up the environment, and reaching out for the international goodwill that would result from narrowing the politically sensitive trade surplus - which reached $112.53 billion in the first half of this year, up 84% from a year earlier.
The Federation of Hong Kong Industries says 45,000 Hong Kong-owned factories will be adversely affected by the changes. For 14,500 of them, according to a Hong Kong Trade and Development Council report, the damage will be serious, and 1,500 are expected to cease production altogether. As a result, the council projects that 375,000 mainland and 10,000 Hong Kong workers will lose their jobs.
Meanwhile, however, Hong Kong investors, who have played a huge role in the 40-fold boom in the Chinese economy over the last 25 years, are wondering what hit them.
"The whole situation is not very good," said Danny Lau, chairman of the Hong Kong Small and Medium Enterprise Association, which has been lobbying the Hong Kong government for help. "We are expecting $3 billion will be held up [in deposits] as a result of the new regulations. This will be especially hard on SMEs [small and medium enterprises] with a low profit margin."
Lau's association is pressuring the Hong Kong government to persuade Beijing to delay the implementation of the new rules and stagger the introduction of the 1,853 commodities affected by them. The association would also like to see bank guarantees, currently only available through the state-owned Bank of China, extended to Hong Kong banks. "The Hong Kong government can also subsidize some manufacturers to relieve the burden," he said.
Hong Kong authorities are "working closely" with the central government to soften the blow to manufacturers, according to Andrew Leung, an industry representative on the city's Legislative Council. Leung estimates that 10-15% of Hong Kong-invested factories may eventually have to close if the new policy is not changed. In the end, however, he says the writing is on the wall: "This is a strong signal from the central government that China is no longer a place for making cheap, low-end products. Hong Kong companies should look at how to upgrade into higher-value goods."
Tellingly, the state-run China Daily ran a story last week focusing on two Hong Kong companies with factories on the mainland, one that is likely to close down because of the new regulations and one that has admirably planned for this eventuality by moving up the value chain.
The report chronicles the travails of Victor Ho, who took over ownership of a toy factory in Guangdong province from his father seven years ago but is now considering closing shop and letting his 150 employees go.
"It was easy for my father to make money for some time," Ho is quoted as saying. "Time was when one looked at a person enviously if he said he was working for a Hong Kong company." But that time has passed, Ho laments.
By contrast, the article also presents the case of Billabong Enterprises Co and quotes its prescient managing director, C B Chiu, who founded the company in the 1950s and "years ago" transformed it from a low-end manufacturer of gloves into a high-end "environmental-goods maker".
"It is an unwritten rule of business that one should always keep an eye on long-term development," Chiu reportedly said.
If all this sounds a bit contrived - well, it probably is. Beijing has never been blamed for excessive subtlety - or even accuracy - in making a point. But the point nevertheless stands.
In the 1950s, the low-end manufacturing industry was centered in Hong Kong. It has since moved to the southern and eastern coastal areas of the mainland, most notably the Pearl River Delta in Guangdong and the nearby provinces of Fujian and Jiangsu. And now, with the environment in this region disintegrating under the onslaught of largely unregulated manufacturers, the central government has signaled that it is time to move on.
Indeed, manufacturers who opt to relocate their factories to central or western provinces or autonomous regions - such as Shanxi, Xinjiang and Gansu - are exempted from the new rules. This inducement fits into a broader plan to close the enormous income gap that exists between the wealthy coastal cities of the south and east and much of the rest of the country. For low-end manufacturers like the China Daily's archetypal Ho, however, the cost of relocation will be too much to bear.
With labor costs also rising as the mainland prepares to enter its third consecutive decade of breakneck economic growth, Hong Kong entrepreneurs with the capital to branch out may consider not only China's hinterlands but also other low-cost, loosely regulated countries, such as Thailand, Vietnam, Indonesia and the Philippines. As it turns out, the gilded age may be a movable feast-cum-environmental disaster.
Kent Ewing is a teacher and writer at Hong Kong International School. He can be reached at kewing@hkis.edu.hk. ¶ 2:26 AM
By Kent Ewing，Asia Times Online
HONG KONG - China's gilded age of easy profits, cheap labor and unchecked environmental degradation may be coming to an end - at least for the tens of thousands of Hong Kong companies invested in the mainland's mammoth manufacturing industry.
Draconian new rules taking effect this week will force manufacturers to pay at least a 50% deposit on import levies, impose restrictions on exports, and also mandate the installation
of expensive anti-pollution technology.
The aim of the new regulations is clearly to reduce international tension over China's ballooning trade surplus, clean up the country's woefully deteriorating environment, and at the same time move its manufacturing industry up the value chain.
Hong Kong companies, which are invested in nearly half of the manufacturing done on the mainland, will be hit hardest by the changes, and they are mustering all of their resources to resist them. But the die is cast, and a new reality is about to begin.
In explaining the new rules, the Commerce Ministry's industry director, Wang Qinhua, said: "The new policy will add cost and affect the cash flow of exporters, especially those engaged in the labor-intensive part of the industry. Our calculation shows that the impact will force exporters to increase value to their products and upgrade their technology."
She added: "We hope these enterprises can follow the bigger situation and quicken their pace of adjusting their own product mix, increase their own intellectual-property rights, and develop the high end of their industry supply chain."
No doubt the central government hopes Wang's message was heard loud and clear in Washington, where Congress - up in arms over the slow appreciation of the Chinese currency, the yuan, and the ever-widening trade deficit with Beijing - has threatened to impose trade sanctions against China. But the new policy comes too suddenly for Hong Kong companies operating factories on the mainland. Crying foul, they are running to the Hong Kong government for help.
The regulations not only require manufacturers to install costly anti-pollution technology and add more than US$1 billion to the cost of their exports, but industry analysts say they could also tie up $2 billion to $3 billion in deposits that would otherwise be used for making more toys, electronics, clothing and other cheap goods.
Starting this Thursday, companies that import any of 1,853 different commodities - including plastics, metals and textiles - must pay at least a 50% deposit on their import taxes, and the number of commodities subject to this deposit is expected to expand to about 5,000 in the future.
The processing trade - in which Hong Kong companies play a particularly big role - will be hit the hardest, with analysts expecting a rise of 30% in export costs for such enterprises.
Of the more than 90,000 processing-trade firms operating on the mainland, China's National Bureau of Statistics reports, 57,500 are Hong Kong-invested. As these firms employ 9.6 million workers, the new policy will clearly involve layoffs. But Beijing is ready to accept that loss in exchange for moving up the value chain in manufacturing, cleaning up the environment, and reaching out for the international goodwill that would result from narrowing the politically sensitive trade surplus - which reached $112.53 billion in the first half of this year, up 84% from a year earlier.
The Federation of Hong Kong Industries says 45,000 Hong Kong-owned factories will be adversely affected by the changes. For 14,500 of them, according to a Hong Kong Trade and Development Council report, the damage will be serious, and 1,500 are expected to cease production altogether. As a result, the council projects that 375,000 mainland and 10,000 Hong Kong workers will lose their jobs.
Meanwhile, however, Hong Kong investors, who have played a huge role in the 40-fold boom in the Chinese economy over the last 25 years, are wondering what hit them.
"The whole situation is not very good," said Danny Lau, chairman of the Hong Kong Small and Medium Enterprise Association, which has been lobbying the Hong Kong government for help. "We are expecting $3 billion will be held up [in deposits] as a result of the new regulations. This will be especially hard on SMEs [small and medium enterprises] with a low profit margin."
Lau's association is pressuring the Hong Kong government to persuade Beijing to delay the implementation of the new rules and stagger the introduction of the 1,853 commodities affected by them. The association would also like to see bank guarantees, currently only available through the state-owned Bank of China, extended to Hong Kong banks. "The Hong Kong government can also subsidize some manufacturers to relieve the burden," he said.
Hong Kong authorities are "working closely" with the central government to soften the blow to manufacturers, according to Andrew Leung, an industry representative on the city's Legislative Council. Leung estimates that 10-15% of Hong Kong-invested factories may eventually have to close if the new policy is not changed. In the end, however, he says the writing is on the wall: "This is a strong signal from the central government that China is no longer a place for making cheap, low-end products. Hong Kong companies should look at how to upgrade into higher-value goods."
Tellingly, the state-run China Daily ran a story last week focusing on two Hong Kong companies with factories on the mainland, one that is likely to close down because of the new regulations and one that has admirably planned for this eventuality by moving up the value chain.
The report chronicles the travails of Victor Ho, who took over ownership of a toy factory in Guangdong province from his father seven years ago but is now considering closing shop and letting his 150 employees go.
"It was easy for my father to make money for some time," Ho is quoted as saying. "Time was when one looked at a person enviously if he said he was working for a Hong Kong company." But that time has passed, Ho laments.
By contrast, the article also presents the case of Billabong Enterprises Co and quotes its prescient managing director, C B Chiu, who founded the company in the 1950s and "years ago" transformed it from a low-end manufacturer of gloves into a high-end "environmental-goods maker".
"It is an unwritten rule of business that one should always keep an eye on long-term development," Chiu reportedly said.
If all this sounds a bit contrived - well, it probably is. Beijing has never been blamed for excessive subtlety - or even accuracy - in making a point. But the point nevertheless stands.
In the 1950s, the low-end manufacturing industry was centered in Hong Kong. It has since moved to the southern and eastern coastal areas of the mainland, most notably the Pearl River Delta in Guangdong and the nearby provinces of Fujian and Jiangsu. And now, with the environment in this region disintegrating under the onslaught of largely unregulated manufacturers, the central government has signaled that it is time to move on.
Indeed, manufacturers who opt to relocate their factories to central or western provinces or autonomous regions - such as Shanxi, Xinjiang and Gansu - are exempted from the new rules. This inducement fits into a broader plan to close the enormous income gap that exists between the wealthy coastal cities of the south and east and much of the rest of the country. For low-end manufacturers like the China Daily's archetypal Ho, however, the cost of relocation will be too much to bear.
With labor costs also rising as the mainland prepares to enter its third consecutive decade of breakneck economic growth, Hong Kong entrepreneurs with the capital to branch out may consider not only China's hinterlands but also other low-cost, loosely regulated countries, such as Thailand, Vietnam, Indonesia and the Philippines. As it turns out, the gilded age may be a movable feast-cum-environmental disaster.
Kent Ewing is a teacher and writer at Hong Kong International School. He can be reached at kewing@hkis.edu.hk. ¶ 2:26 AM
