China's manufacturing sector falls on hard times

Dongguan city in Guangdong province of China was once praised "world's factory within the world's factory", and the epitome of China's industrial prowess now seems to have lost it. The closure of Dongguan Gogo Garment, the city's largest lingerie manufacturer closed on January 10 as the company cited dwindling customer orders and failed attempts to break into the domestic market as the reasons behind its downfall, The Diplomat reported.

Founded in the 1980s, Gogo Garment had specialized in Original Equipment Manufacturer (OEM) production for prestigious international lingerie brands, boasting a workforce that had grown to nearly 10,000 employees at its peak. Spanning tens of thousands of square meters, it had been the trusted partner for renowned global high-end lingerie brands, weathering tough market competition for 43 years. However, despite its resilience, the company succumbed to bankruptcy this year.

In July 2022, Koppo Electronics, a Fortune 500 company employing more than 6,000 workers decided to cease operations due to unpaid cross-border e-commerce payments, a backlog of finished goods, and a sharp decline in domestic and international orders.

Even with the easing of Covid-19 measures, the situation did not improve. Many factories in Dongguan are grappling with heavy burdens and teetering on the brink of collapse, with the imminent risk of closure looming over them.

Despite hopes that surviving 2022 would bring relief, the reality is stark as there are no signs of improvement yet in 2023. Many manufacturing companies in the region have observed a significant shift in global supply chains, with no orders received this year. Factory closure notices are becoming increasingly straightforward.0

In fact, the dire situation of shutdowns, closures, bankruptcies, and collapses is not limited to Dongguan alone, but extends to the entire Pearl River Delta region, including the Greater Bay Area.

Many of the typical 'Made in China' manufacturers, which have persevered and struggled until the end, have not been spared from the unfolding crisis. These decades-old enterprises assumed their prosperity would be everlasting. However, the reality is that both private and state-owned manufacturing industries in the southeastern coastal regions of China face unprecedented challenges.

The real estate sector's ability to weather the storm in light of the current state of manufacturing is questionable. The housing market is facing significant challenges, with many properties struggling to sell.

As of February 2023, an estimated 3.5 billion square feet of completed residential buildings in China remained unsold, equivalent to around 4 million residential units. Real estate consulting agencies estimate that approximately one-third of all newly constructed homes in China in 2022 remain unsold, marking the highest proportion since 2015.

From an economic development perspective, the most straightforward and uncomplicated path to prosperity is through land and real estate development. This is considered simple because one can potentially make substantial profits simply from owning a piece of land.

However, this seemingly effortless approach to wealth accumulation relies on assumptions that houses will always be sellable, people will always have stable employment with consistent wage and income growth, investments will perpetually yield positive returns, and real estate prices will continue to rise while social inflation remains unaffected.

The deep-rooted issues of the manufacturing industry of China will lead to the collapse of China's economy. The lack of employment opportunities leaves people unable to purchase houses, and those who have already purchased houses will struggle to repay their mortgages.

The potential decline in the industrial economy could be more severe and rapid than anticipated, with only military-industrial enterprises showing willingness to invest despite costs.