As China's Losses Mount, Confidence Turns to Fear

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By Ariana Eunjung Cha
Washington Post Foreign Service
Tuesday, November 4, 2008

SHENZHEN, China -- When Chong Yik Toy Co. went bankrupt, the bosses fled without meeting their payroll and angry workers took to the streets in protest. Less than 72 hours later, the local government came to the rescue.

Armed with bags full of cash totaling half a million dollars, accountants began distributing the money so the 900 former employees would have something to get by on. The Chinese officials who made the emergency payments on Oct. 21 called it an "advance," part of a "back-pay insurance fund."

But the reality was obvious to everyone: It was a government bailout.

In the initial weeks of the global financial crisis, Chinese officials resolutely declared that they were not significantly affected. But now, as factory closings, dire corporate earnings reports and stock market losses continue to mount, the Communist Party's confidence has changed to another feeling entirely: fear.

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

Meanwhile, government figures released last month show that the gross domestic product grew by 9 percent in the third quarter -- robust by almost any standard, but not in China. Here, the figure represented the slowest growth in five years, and was dangerously close to 8 percent. That's the level at which economists say China needs to grow in order to keep generating enough factory jobs to maintain stability in the labor market, as millions of peasants continue to pour into Chinese cities in search of work.

At the same time, some of China's most revered companies, whose growth once seemed limitless, have reported surprising losses in the past few days. Air China, the nation's biggest international carrier, posted its first loss in seven quarters because of declining passenger numbers and wrong-way bets on fuel prices. Bank of China, the nation's largest foreign-exchange lender, said that as credit-market losses went up, its profit growth went down to its slowest in two years.

China's leaders have made a variety of moves to try to stabilize the economy -- three interest rate cuts in six weeks, new export tax rebates, reduced costs for home buyers, and billions spent on infrastructure. But any hope that a strong Chinese economy -- the single largest contributor to global growth -- would offset the slowdown elsewhere is gone.


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