China Shutters Down

First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.

And then he was gone.

And just like that, China's biggest textile dye operation -- with four factories, a campus the size of 31 football fields, 4,000 workers and debts of at least $200 million -- was history.

"We're pretty much dead now," said Mao Youming, one of 300 suppliers stiffed last month by Tao's company, Jianglong Group. Lighting a cigarette in a coffee shop here, the 38-year-old spoke calmly about the bleak future of his industrial gas business. Tao owed him $850,000, Mao said, about 60% of his annual revenue. "We cannot pay our workers' salaries. We are about to be bankrupt too."

Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year, said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year's end, he said, more than 100,000 plants will have closed.

As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade.

Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold -- prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories -- many operations were pushed over the edge.

China's engine slows

China's industrial decline is a main factor in the sharp economic slowdown of late. The nation's gross domestic product grew at an annual rate of 9% in the third quarter, the lowest in five years and worse than what analysts had forecast. China's GDP expanded 11.9% last year. Now, economists worry that the one big remaining engine of global growth is rapidly losing steam.

Chinese leaders are trying to maintain stable and fast growth to control rising joblessness and the risk of political and social turmoil. Last month, Beijing increased tax rebates for many exported goods and pledged to take other steps to spur development, including prodding banks to boost lending to small companies. But many businesses and analysts are not optimistic.

"Honestly, I think whatever measures government would take at the current stage would not turn around this trend," said Ye Hang, an economics professor at Zhejiang University. "The government can only try its best to put out a fire here and there."

In recent weeks, there have been many fires, increasingly large-scale. In Zhejiang province, south of Shanghai, Ye counted at least six major bankruptcies, including Jianglong; Feiyue Group, China's biggest sewing machine maker; and Zhejiang Yixin Pharmaceutical Co., among the largest in that industry.

"Of these six, one [owner] committed suicide, one was detained by police, and the remaining four all escaped," he said. "I can imagine that in the future, there would be more such cases as a result of the chain reaction."

The wave of factory closings began in Guangdong province, where the nation's economic reforms were launched three decades ago.

The region accounts for about 30% of China's exports, but over the last couple of years, Shenzhen, Dongguan and other cities in the area have sought to clean up the environment and create an economy based more on services and higher-value products. Makers of labor-intensive goods such as shoes, garments and furniture no longer felt welcome.

By the official numbers, Chinese exports remained brisk through September, except for a few categories such as apparel, which fell 3% in September from the same month in 2007. But many exporters aren't making a profit, and others are seeing shrinking orders or are starving for cash. Newspapers in Hong Kong, which is close to Guangdong, have been running virtually daily reports of the latest factory to falter.

"Don't even mention the U.S. market," grumbled Zhong Shijun, general manager of Foshan City Golden Furniture Co. "Even our EU market is dropping seriously in the last two months because the euro is depreciating."

Toy makers are among the hardest hit. More than 3,600 such factories have closed -- about half the industry's total, government figures show. Most were small operations, but last month Smart Union Group's three huge factories stopped production, leaving more than 8,700 workers jobless.

After workers protested in the streets, Guangdong's government said it would cover $4 million in back wages and help them find jobs. But many others have no one to help them. Migrant workers generally don't qualify for unemployment benefits, and although China's bankruptcy laws give unpaid workers priority, that's of little value if owners run away and there are few corporate assets.

Left without wages

Yang Shenggang, 33, had been at a Shenzhen shoe factory for seven years, working his way up from the assembly line, making $50 a month, to become a supervisor earning six times that amount. This spring, he said, the Hong Kong owner fell behind in paying wages.

One morning in September, the plant abruptly closed.

"The boss was just gone," Yang said. "I have to get my five months' salary back. My family needs money to eat and live."

Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, a trade group with 3,000 members, said he didn't know how many owners in Hong Kong had run away.

"I think it's wrong," Lau said. But he added: If a factory operator went by the book, it could take two years to close a shop because of regulations and red tape.

Others may flee not out of aversion to bureaucracy but because they want to get away with what cash they have left and not face angry suppliers, lenders, employees or regulators. Sometimes relatives and managers who help run operations flee too, and without anyone who can take responsibility, some factories have little choice but to shut down.

Lau's trade group has estimated that as many as 15% of the 70,000 factories run by Hong Kong businesspeople in the mainland will close this year. He says many more are likely to shut after Chinese New Year in February, when millions of migrant laborers will return home for several days.

"Once workers go home, they can close down the factory quietly," he said in an interview in Hong Kong.

Taiwanese operate about 20,000 plants in Guangdong, and some of them also have walked away from their factories, workers and labor groups say. In northern China's Shandong province, dozens of South Korean export company managers have fled, according to state-run media reports.

"If these laid-off migrant workers stay in the city, it might cause social problems in the urban areas," said Cao, the Chinese academy economist. "But if they go back to their hometown, they won't have enough to do to make money."

Thousands of workers face that dilemma in Shaoxing, about 140 miles south of Shanghai. Companies with names such as Rich-tex and Sun-tex dot the city, the capital of China's textile industry.

Industry giant falls

Few were bigger than Jianglong, which is Chinese for "River dragon." The company posted sales of about $110 million and a profit of $14 million last year, according to its annual report. Its owner, Tao, boasted of the company's sophisticated research and development capabilities and a base of global customers that included Wal-Mart.

Tao, a balding man with thick bags under his eyes, was a mystery to most workers and suppliers. He and his wife arrived in Shaoxing earlier in the decade, opening a four-person trading firm catering to Middle Eastern buyers, said people from Tao's hometown in neighboring Jiangsu province.

By 2004, he was exporting $2.5 million of goods, and two years later, after listing the company on Singapore's stock exchange under the name China Printing & Dyeing Holding Ltd., Tao bought two companies and built a massive factory outfitted with Japanese and Italian equipment. This year, as he began to miss or delay payments to suppliers, Tao told them he would soon be raising tens of millions of dollars by listing the company on the Nasdaq Stock Market.

But Tao's plans were foiled by the global financial crisis and the sudden turn of fortunes for exporters, according to suppliers, many of whom fault the local government for supporting Tao and continuing to assure them and employees that the company's listing on Nasdaq was on track.

Government officials said last week that Tao and his wife had been caught, but they refused to comment further. "It's very hard for me to analyze why or how it had this problem," said Jin Agen, vice director of Shaoxing's Publicity Department.

On the day Jianglong was shut down, 2,000 workers jammed the streets outside the factory, blocking traffic and demanding answers. Several hundred police officers scuffled with workers. Later that day, government officials agreed to pay employees.

"I'll go home and farm," said Yang Chaoxian, 43, who had earned about $260 a month working 12 hours a day, seven days a week. "Labor here is too hard," said the Chongqing native, a cigarette tucked behind his ear. "After I leave, I don't ever want to come back."

Source - Los Angeles Times