Whether you blame it on falling global demand or troublesome domestic weather, it appears that China’s factories are slowing down. Output growth in February was the slowest seen since March 2007 as CLSA’s Purchasing Managers’ Index (PMI) - which is intended to give a picture of the manufacturing climate in general - fell for the third month in a row.

The bad weather hit both production and deliveries but CLSA said the dip in the PMI was perhaps less anomaly and more part of an underlying trend. All of the individual indices that make up the PMI were down in February, with the exception of stocks of finished goods, which suggests things might not be flying off the shelves like they once were. However, it’s worth pointing out that growth in new orders, while down on the previous month, remains robust - and this is largely due to strong domestic demand rather than export orders, which once again saw modest growth.

February’s input and output cost indices were also down from the record highs seen in December, a development that may seem at odds with the current climate of domestic inflation and rising global commodity prices. But prices are still above the long-term average and manufacturers are expected to encounter profit pressure as they try - and perhaps ultimately fail - to pass on a higher proportion of production costs to the consumer.

This is in keeping with the conclusion drawn by Andy Rothman, CLSA’s China macro strategist, writing in the March issue of China Economic Review: The key issue for equity investors in China this year is margin squeeze.

Bill Dodson at the This is China! Blog makes an interesting point on companies trying to escape local environmental regulations by relocating to the next, less demanding county in this post (quoting from this Reuters article on the same subject):

Despite the trend of polluting factories moving inland to provinces such as Hunan, Guangxi, Zhejiang and Jiangxi, there have been examples of authorities hitting back.

That implies in my mind that as Western companies expand into the interior of China, they need to do their due diligence about just who their neighbors are. And don’t just necessarily follow the big names into the small cities: the Central Government recently tagged some MNCs like Pepsi, LG and Samsung for fouling the environment.

A new IPE report, written in collaboration with investment bank CLSA and green group WWF, found Chinese public and media pressure was playing a crucial role in filling a void in official enforcement, with complaints made to environmental authorities increasing 30 percent annually and hitting 600,000 cases in 2004.

A modern-day Chinese society that values environment over making money: now that’s downright anti-socialist with Chinese characteristics.

Do we see positive signs for the trade balance in the latest CLSA Purchasing Managers’ Index (PMI)? Although the manufacturing sector continued to expand thanks to a steady stream of new orders, most of the demand came from the domestic market. Export orders saw only a modest rise, which is seen as evidence that the removal and reduction in tax rebates on a wide range of exports is having its desired effect.

New orders were certainly at nothing like the levels recorded in May and June when manufacturers were rushing to get business done ahead of the tax changes.

These changes were brought in ahead of this summer’s round of US-China trade talks in Washington - an attempt to appease the hawks who were squawking about China accounting for the largest portion of America’s record trade deficit. Removing the tax rebates would push up export prices as suppliers moved to protect their profit margins, thereby making Chinese goods less financially attractive. Less exports means a lower trade surplus.

This is how the theory goes and, according to the CLSA figures, there may be some truth behind it: Output prices are at their highest in a year. However, the key driver of the price inflation is believed to be a spike in input prices. Respondents to the CLSA survey pointed to oil, steel, foodstuffs and transportation as areas where they are experiencing significant cost increases.

The verdict for foreign buyers in China is not a happy one. “Profit margins will collapse in China if any weakness in top line sales emerge over the next few months on the back of a global credit crunch,” said CLSA Chief Economist Dr Jim Walker.

A slightly macabre post today. The news of toy company boss Zhang Shuhong’s suicide in the wake of Mattel’s first global product recall brought to mind another recent suicide, also apparently caused by external pressures. On June 3, Song Pingshun, formerly Tianjin’s representative to the Chinese People’s Political Consultative Conference, was found dead in an apparent suicide as he was being questioned for corruption.

The 61-year-old Song’s rank was equivalent to that of a cabinet minister, because of Tianjin’s economic clout, according to Reuters. Song had held a number of powerful positions in the city over the course of his career, having been vice mayor, chief of police and party official in charge of the judiciary and law enforcement.

Song was expelled from the party posthumously in July, a rare disgrace. From China Daily:

The CPC Central Commission for Discipline Inspection decided to take the rare step of posthumous expulsion after finding that Song had “abused his public power to seek benefits for his mistress, seriously violating CPC discipline.”

“Song, morally degenerate, kept a mistress and helped her obtain money through illegal means,” the discipline watchdog said.

Talk about flogging a dead horse!

Cheeky feline blogger Black and White Cat makes some excellent points about the mysterious circumstances surrounding Song’s death, including the fact that mainland media took nearly a month to report it, and that initial reports couldn’t even determine whether he had suffocated himself or leaped out of a building.

Whether it’s business or politics, it seems suicide is a new way out.

Highlights from the last week of China business news: Inflation’s hitting new highs, and the price of everything from instant noodles to electricity and sugar is on the rise, while the EU’s Consumer Commissioner pays a visit to Chinese factories and comes away distinctly unimpressed. (more…)

The always delightful to read Peter Hessler (author of River Town and Oracle Bones) has a nice long article up on the National Geographic site on the Wenzhou entrepreneurial spirit, the factories that sprout up and get torn down with equal speed, and … bra parts. One choice bit:

After its arrival on the mainland, where production costs are much cheaper, “the Machine” essentially minted money. The boss got rich, and then a worker named Liu Hongwei got an idea. Despite his lack of formal education, Liu was a skilled mechanic, who worked closely with the Machine. Meticulously, he memorized the assembly line, piece by piece, and in secret he sketched out blueprints. When the plans were complete, he contacted a second boss at a company called Shangang Keji, in the city of Shantou.

In 1998, Boss Number Two hired Liu and took the blueprints to Qingsui Machinery Manufacture Company, in Guangzhou, which custom-built the assembly line. Initially, the new Machine didn’t work—nobody’s memory is perfect, after all—but two months of adjustments solved the problems. Shangang Keji began producing bra rings, but then Liu found Boss Number Three, at a company called Jinde. Every time Liu jumped, he demanded money for his blueprints and expertise; some believe he made as much as $20,000.

Without knowing it, the man was following a path blazed by other societies that had also experienced sudden manufacturing booms. In 1810, a wealthy American named Francis Cabot Lowell traveled to England, where he used his connections to tour the world’s premier textile mills. British law forbade the export of machinery or blueprints, but Lowell had an excellent memory. He returned to the United States, where, in the words of his business partner, he re-invented the Cartwright loom. Lowell became an American hero, with a Massachusetts factory town named in his honor.