Pressure on China’s factories grows as U.S. demand falls

BEIJING – For some factories in China, it is not full steam after the end of zero-Covid.

All of the factories US toymaker Basic Fun employs in China — about 20 people — have told workers not to return immediately after the Lunar New Year holiday, CEO Jay Foreman said.

That’s because of a flood of inventory in the first half of last year, which went unsold as consumer prices in the U.S. rose in the summer and fall, he said. Fun Basic products include Care Bears and Tonka Trucks.

The official Lunar New Year holiday in China ends on January 27, but the travel period lasts until February 15. The festival is usually the only time each year that migrant workers – more than 170 million of them in China – can visit their hometowns.

“Every factory I’ve talked to says they’re going to have fewer employees this year than last year,” Foreman said. He expects US consumer demand to pick up later this year.

China’s exports to the US in the toys, games and sports category account for about 6% of all exports to the country, according to Chinese customs data accessed through Wind Information. The toy export category to the U.S. declined slightly in 2022, the data showed.

“Retail, whatever discretionary consumers, they hit quite hard. It’s really a combination of high inventory and demand sticks quite a lot to the export market,” said Johan Annell, partner at Asia Perspective, a consulting firm that works mainly with Northern European companies that operate in East and Southeast Asia.

He said consumer electronics is seeing a similar situation.

“For the rest of the industry, the picture is better. Some are struggling to keep up with their back orders and catch everything they had to deliver last year,” he said.

China abruptly ended its zero-Covid policy in December. But restrictions on business activity are being extended in 2022, including a two-month lockdown of Shanghai in the spring.

Retail sales in the U.S. — China’s largest trading partner on a single-country basis — have been slowing. China’s exports to the US will barely grow in 2022, and the US economy is expected to slow further in 2023.

That’s on top of tariffs and bilateral tensions, which have escalated over the past few years.

“We expect it to continue to grow, but the pressure is too much,” said Ryan Zhao, director of Jiangsu Green Willow Textile, in Mandarin, translated by CNBC.

“From what I hear about the market, 2023 will be very difficult. US demand is down. The Russia-Ukraine war is not over yet.”

Some US client orders have gone missing.

Zhao said his company is working with a high-end New York bedding and textile brand that filed for bankruptcy last year. To survive in a “shrinking” market, he said the company is turning to cheaper products that are popular with younger consumers.

That means to increase revenue, Zhao needs to sell more goods than before – and he plans in the next few months to hire 10 local workers for his 30-person factory in China.

When asked by CNBC in January, China’s customs administration acknowledged pressure on Chinese exports due to slowing external demand, and noted the rising risk of a global recession.

Trade data shows demand for Chinese goods is rising in other markets, such as Southeast Asia.

Since China’s Covid wave ended, employers have increased their share of part-time positions and manufacturers are increasingly paying workers weekly, rather than once a month, according to Qingtuanshe, a job search platform on Alipay’s mobile app.

While there has been no apparent change in wages since the reopening, Qingtuanshe noted the salary range for factory workers has dropped significantly during the pandemic.

For China’s domestic economy, the decline in overseas demand points to a wider employment problem: a shortage of skilled factory workers.

“It’s generally become more difficult to find workers and to find the right workers,” Annell said.

“You have some high youth unemployment and there’s a lot of labor, but when you start looking in certain cities, it’s hard to find qualified supervisors” and technical workers, he said.

Manufacturing accounts for 18% of China’s workforce, and other construction workers 11%, said Dan Wang, Shanghai-based chief economist at Hang Seng China. However, the majority only have a high school education at best, making it difficult to transfer to other industries, he added.

He expects there to be more than 1 million unemployed people in rural areas – which are not counted in the official statistics on urban unemployment. He attributed this to a decline in exports and a push for automation in China, while the real estate sector’s demand for construction workers is down.

Poor consumption growth also limits the extent to which the service sector can absorb new workers, as it did before the pandemic, Wang said.

“It seems that the main solution still lies in some government-sponsored training. As time goes on, more of these workers will need to be trained in order to earn a living.”