Chinese Manufacturing Slumps, Service Industry Grows

Chinese manufacturing contracted to a nine-month low in August as export markets in Europe, the United States and Russia continue to be anemic.

The official purchasing-managers index fell to 49.2 last month, according to data from the China Federation of Logistics and Purchasing, which issued the figures with the National Bureau of Statistics. A reading below 50 shows contraction.

As a result of weakening consumer demand abroad, Chinese manufacturers are having to cope with delayed orders and extended payment agreements, while promised tax rebates for exporters are slow to materialize.

But industrialized South China is suffering from more than the knock-on effects of an ailing Western economy and insufficient stimulus from the Chinese government.

The West may be dropping it orders for goods, but this is combined with rapid Chinese wage inflation which has prompted many Western retailers—as well as those in Japan—to move orders to Southeast Asia.

Japan’s imports of garments from Southeast Asia rose 22 percent in the first half of this year while Chinese garment manufacturers say their gross margins have shrunk from 30 to 50 percent in the late 1990s to five to eight percent today.

Labor-intensive garment factories are a thing of the past for China. Its future lies in high-tech—both for the export and domestic market— as well as value-added industries and services.

The services sectors remain a huge growth territory for China, with rapid expansion in Internet software, air transport, and residential services.

Yet developing a more sophisticated manufacturing and services sector is not easy. Positive change takes time and investors are a nervous bunch.

The city of Shenzhen, across the border from Hong Kong, is a good example of how to do it right. Shenzhen has more than $30 billion in foreign investment and joint ventures in both manufacturing and services.

As the U.S. struggles to reinvent its own manufacturing economy, China embarks on a parallel journey and we’ll continue to see an evolving dynamic between these two super-powers.

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