Aurelia Butler

From slowing global demand to rising geopolitical tensions and a tentative post-Covid recovery, China’s manufacturers are facing some of the strongest headwinds in years.The tale of three factories — spanning footwear and electronics — illustrates how manufacturers are experiencing a slowdown in the world’s second-biggest economy.Factory activity, one of the main pillars of economic growth through the pandemic, has slowed for four consecutive months through July. The Chinese Communist party’s politburo last week acknowledged the economy’s “tortuous progress” since the lifting of pandemic restrictions, vowing measures to “actively expand domestic demand”, such as spurring consumer spending.“Things are pretty bad,” said Alicia García-Herrero, chief Asia-Pacific economist at French investment bank Natixis. Domestic demand “will only recover with a big stimulus”, she added, and “industrial production overall will underwhelm”.This picture has been complicated by President Xi Jinping’s desire for “high-quality” growth, a strategy that favours tech industries over the vast manufacturing hubs that churn out basic consumer goods.

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Feng Tai Footwear‘Our sector is in misery’• Orders dropped by a third from the second half of 2022 and production nearly halved from 5mn pairs of shoes pre-pandemic• Mainland factories are operating below capacity because of dip in demand• Company is exploring new markets because it believes US demand will not reach previous levelsFeng Tai Footwear exemplifies the difficulties faced by the low-technology manufacturers on which China’s economic success has been built. Prior to the pandemic it sold some 5mn pairs of shoes a year to clients such as Walmart and Target. This year it will do well to sell 3mn. Orders for the second half of this year — typically filled by July — are down at least a third compared with last year.“Our sector is in misery,” said chief executive Eddie Lam, who runs more than 10 manufacturing plants in China and employs more than 3,000 workers. “Orders often get cancelled halfway . . . Some buyers say they no longer have sufficient budgets. The sentiment is poor.”“We are basically at a standstill,” he added. “Our workers are sometimes not even working their full-time hours.”China’s monthly export delivery value of goods made with leather, fur or feathers as well as footwear has fallen more than a third from 2019, hitting nearly Rmb17bn ($2.4bn) in May this year. The domestic market is tough, too, the company added, as shoes sell for a “much lower price” online. Still, that is where Lam is pinning his hopes for growth, along with new markets opening up under China’s Belt and Road international infrastructure development initiative.

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Some of the company’s clients have asked if it can set up factories outside China, but Feng Tai has no plans to do so yet.“The US knows very well that it cannot risk decoupling from China,” Lam said. “I just don’t see the advantage of moving production to south-east Asia with higher supply chain costs and additional investments required.”Tien Sung Group‘We can’t put all our eggs in one basket’• Hong Kong-based owner has two factories making sportswear in Vietnam as well as one in Guangzhou and one in Cambodia• Growth in orders has slowed since the pandemic, from double digits to a forecast of flat growth next year, though fast-fashion peers are doing worse• Will focus on exporting to the US and Europe as a long-term strategyGeopolitical tensions between Beijing and Washington, as well as supply chain disruption during the Covid-19 pandemic, have spurred more manufacturers to shift out of China.Rex Ho’s family business, which makes clothes for Adidas, Puma and New Balance, was an early adopter of a “China plus one” strategy, shifting some garment manufacturing to south-east Asia more than a decade ago.“We have to consider [China] ‘plus one’ or even more,” said Ho, managing director of Tien Sung Group, referring to geopolitical tensions and supply chain disruptions. “We can’t put all our eggs in one basket.”The Hong Kong-headquartered company, which has about 5,000 employees, began operations at its second factory in Vietnam in April. It also has a factory in Cambodia and one in China’s southern city of Guangzhou.About 80 per cent of its revenue comes from exports to Europe and the US. “Our clients are still talking about how they do not want their products to be ‘made in China’,” he said. Labour costs are also a factor. Sewers, for example, are paid about $800 a month in China, compared with roughly $400 and $600 in Cambodia and Vietnam respectively.But moving out of China offers little protection from global economic headwinds. Ho, also of the industry group Hong Kong Apparel Society, said some of his peers reported orders falling 20 per cent or more in the first half of this year as retailers cleared excess inventory. With rising interest rates, some buyers have demanded payment extensions.Anhui Tiger‘Growth has been really, really rapid’• The electronic components manufacturer expanded 30 per cent annually each year during the pandemic, helped by rising demand for clean energy in the west• Clients include Whirlpool and Swiss industrial group ABB• Has three factories in mainland China employing 700 people but is setting up a factory in Vietnam under client pressure to expandWhen Xi declared “forceful” measures this year to encourage high-end manufacturing development, electronic components manufacturers such as Anhui Tiger were in prime position to benefit from the policy shift.The company, based in Hefei in China’s eastern Anhui province, makes electronic parts such as high-frequency transformers and power inductors for cars and green power generation.They also supply components for clients including US-based Whirlpool and Swiss industrial group ABB.

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While demand for consumer electronics has fluctuated, the company grew about 30 per cent annually each year during the pandemic, recording revenue of about Rmb150mn in the first half of 2023. “Europe is accelerating the transition to clean, renewable energy, so we’ve seen an increase in demand in these sectors,” said general manager Xing Xuhua. “Growth has been really, really rapid.”This is part of a wider trend. China’s industrial production of electrical equipment and machinery rose 15.4 per cent year on year in May, according to Natixis. Exports of vehicles jumped 110 per cent year on year in dollar terms in the first half of the year, while the dollar value of textiles and garments exports dropped 8.3 per cent, customs data showed.Western companies are highly reliant on Chinese equipment and products for their transition to clean energy, said Xing.Still, Anhui Tiger is not immune to pressure to expand outside China. The company is in the process of setting up its first plant in Vietnam. “When clients threaten to drop orders,” Xing said, “we have to say yes.”Additional reporting by Thomas Hale in Shanghai More

China’s metals and mining investments overseas are on track to hit a record this year, new data shows, as the country races to secure resources to defend its position as the world’s biggest producer of electric vehicles, batteries, solar panels and wind turbines.In the first half of this year, Chinese investments and new contracts in the mining and metals sector topped $10bn, according to a report from the Green Finance & Development Center at Fudan University in Shanghai reviewed by the Financial Times. That figure is more than the 2022 full-year total, and puts this year’s investments on track to exceed the previous record of $17bn in 2018.China’s investment in the sector includes nickel, lithium and copper projects as well as uranium, steel and iron, highlighting intensifying efforts by Chinese companies across the clean technology supply chain to lock up access to resources amid forecasts of booming long-term demand as the world fights climate change.The investments, which have spanned countries in Africa, Asia and South America, also reflect President Xi Jinping’s ambitions of economic self-reliance as he seeks to fortify China against the impact of rising geopolitical tensions with the US. “Overall, China’s BRI [Belt and Road Initiative] engagement seems to become more strategic, in regard to both economic and industrial aspects: more bankable projects relevant for China’s and the host countries’ industrial development,” said Christoph Nedopil, director of the centre at Fudan University.Once touted by Beijing as the “project of the century”, the Belt and Road Initiative was launched in 2013 offering countries an alternative to western-led financing for infrastructure projects such as roads, railways, bridges, ports and airports.Xi’s hallmark transnational infrastructure investment programme ultimately drew in 148 countries and has surpassed $1tn in cumulative projects, while endowing Beijing with a potent source of diplomatic influence. Fears over China’s economic leverage have prompted dozens of countries, including Italy, to review their BRI involvement in recent years, while China’s bailout lending has ballooned following a series of debt write-offs, scandal-ridden projects and allegations of corruption linked to the BRI. While the BRI’s global footprint has shrunk in recent years, the resources sector has proven a rare bright spot. Beijing’s strategic drive to secure raw materials has also accelerated alongside the development of a sprawling domestic processing sector, further reducing its reliance on overseas refiners for metals including copper, aluminium, lithium and cobalt.

The Fudan University data, released on Tuesday, also showed that in the first half of 2023, investments as a share of BRI engagement reached a record 61 per cent, marking the first six-month period that construction contracts accounted for less than half the value of new BRI financing.While the size of BRI deals has proportionally contracted, Chinese private companies have increased investment, picking up some of the shortfall from state-owned enterprises that characterised the scheme’s ambitious earlier years.Nedopil added that changing risk evaluations by Chinese investors and banks meant that new BRI financing was focused on revenue-generating and resource-backed deals, which also benefited metals and mining, rather than construction contracts and infrastructure. Additional reporting by Harry Dempsey in London More

UK shop prices dipped month on month in July for the first time in two years, according to industry data published on Tuesday, adding to evidence that high inflation might finally be starting to ease.The British Retail Consortium said shop prices in July were 0.1 per cent lower than in June, as the annual rate of inflation eased to 7.6 per cent from 8.4 per cent in June, and below the three-month average of 8.4 per cent.The dip was caused partly by big discounts on clothing and footwear as retailers sought to lure customers put off by wet weather. Non-food prices fell 0.2 per cent between June and July, taking the annual rate of inflation down to 4.7 per cent.Food price inflation also slowed for a third consecutive month, with the annual rate easing from 14.6 per cent in June to 13.4 per cent in July — the lowest since December 2022. The BRC said the decline reflected price cuts for several key staples, including oils, fats, fish and breakfast cereal.The figures corroborated other recent evidence that price pressures were finally easing even in the UK, where inflation has so far been more persistent than in the US or eurozone.“While inflation remains high, the outlook is improving,” said Mike Watkins, head of retailer and business insight at research company NielsenIQ, which helps compile the BRC data.

Figures from the Office for National Statistics showed consumer price inflation fell unexpectedly sharply to 7.9 per cent in June from 8.7 per cent in May. Meanwhile, research company Kantar said this month that grocery inflation was easing — with manufacturers such as Premier Foods subsequently announcing they were planning no more price rises this year.However, the data on shop prices will offer only partial reassurance to the Bank of England’s Monetary Policy Committee, which meets on Thursday to vote on a further increase in interest rates.The nine-member panel said in June that it expected goods price inflation to decline this year, but it is more concerned that continuing strength in wages could feed persistently high inflation in services.BRC chief executive Helen Dickinson said Tuesday’s figures were “cause for optimism” but added that there were still “dark clouds on the horizon”. She cited Russia’s withdrawal from the UN-brokered deal to export Ukrainian grain across the Black Sea and India’s new curbs on rice exports. “We expect some global commodity prices to rise again as a result and food prices will be slower to fall,” said Dickinson. More