Trade war headwind blows into China's tire industry

In China's Shandong Province, otherwise known as the country's "tire capital," at least 35 of the 200 tiremakers have gone under since 2017, according to local media reports.

"The factory is mostly closed and no workers are here," the court-appointed administrator of Shandong Yongtai Group, a tiremaker that went bankrupt in August, said last month at its main factory. The company was a top-10 tiremaker in China that employed 5,000 people, but not a trace of that recent past remains.

The company's struggles resonate with many Chinese companies as the impact of the trade war become more apparent in China with each passing day. China's real growth in the July-September quarter slowed to 6.5%, the lowest rate in nearly a decade, as local governments, businesses and consumers alike tightened their purse strings.Shandong Yongtai's financial situation began to deteriorate 10 years ago after the U.S. moved to restrict tire imports from China and environmental regulations tightened. Additional tariffs from the trade war seems to have delivered the final blow.

The futures market for natural rubber used in car tires has fallen 20% since the beginning of the year. China's rubber imports, including synthetic material, fell 10% on the year in September.

There were also 53 cases of default from July to September, totaling 52.1 billion yuan ($7.52 billion), a record for any quarter, said securities brokerage CSC Financial. Three-fourths of those were in the private sector.

The city of Yiwu in central Zhejiang Province boasts the world's largest wholesale market for general merchandise, for instance, but vendors that rely on exports to the U.S. have been hit hard. A tire salesman for bicycle-drawn carts complained that his business is not profitable right now, while the owner of a bag shop lamented several tens of thousands of yuan in lost orders.

"It's not just Americans," an official who runs the market said. "The number of Korean and Japanese buyers has also dropped off."

The impact is evident in industrial data. Production of automobiles, smartphones, integrated circuits and robots all fell year on year in September. Every category except for smartphones was growing by double digits at the start of spring. A slowdown in new orders seems to be the culprit.

Underlying the slowdown is a push by local governments and companies to reduce their debts this year. Chinese authorities have cracked down on shadow banking to curb financial risks, choking off a key source of funding for municipalities and private midsize businesses.

Infrastructure investment by local governments slowed to 3% in the January-September period from 19% last year. The figure is actually negative when rising material prices are factored in.

An economic sentiment survey of small and midsize businesses by the Cheung Kong Graduate School of Business fell 7.9 points in September to 41.9, indicating pessimism. It is the lowest mark since the survey began in 2011, as funds become increasingly difficult to procure. The Chinese economy also faced headwinds in 2015 when state-owned companies suffered from surplus capacity, but this time the pressure is on private businesses.

The 6.5% growth rate for the July-September quarter is the slowest since 6.4% in January-March 2009. Notably, growth dropped 0.2 percentage point from the April-June period. China's growth rate has been stable over the last three years, fluctuating only by 0.1 percentage point. The 0.2-percentage-point drop is the first such decrease since January-March 2015, when the economy began to teeter.

"Downward pressure has increased," National Bureau of Statistics spokesman Mao Shengyong said Friday.

Statistics from surrounding countries reflect the economic slowdown in China. Indonesia's China-bound exports sank 8.6% in September on the year, falling faster than in August. The countries statistics agency said that a decrease in Chinese demand had an effect. Thailand's China-bound exports of auto and electronics parts shrank this year after rising in 2017.

Vice Premier Liu He, a close adviser to President Xi Jinping, appeared on state-run media Friday to calm nerves about sliding share prices, saying the government highly values the stock market's stable development. Tax cuts, infrastructure spending and monetary easing will likely be strengthened to prop up the economy.

"A positive messaging effort by top economic officials belies Beijing’s worries about the state of the economy, although the government has refrained from serious stimulus efforts," said Andrew Coflan, an analyst at the Eurasia Group.

At a meeting this month, Xi pushed for the speedy completion of a railway connecting Sichuan Province with the Tibet Autonomous Region. But such projects will not improve the overall economy's efficiency because they are located in central China and could actually worsen municipal debts. There is also concern about side effects stemming from structural changes brought about by easy money.

In addition, companies are hesitating to make capital investments in China amid the trade frictions. A member survey by the U.S.-China Business Council found that 73% of American companies in the mainland said their business was affected by the tensions.

Taiwan's Hon Hai Precision Industry, also known as Foxconn, has centered production around China but is shifting to the U.S. with plans to build a $10 billion plant in the state of Wisconsin.

Japanese companies in China have also begun to feel the impact. From June to August, Yaskawa Electric received about 30% fewer orders in China year on year for such mainstay products as servo motors, which are used in semiconductor manufacturing equipment and machine tools.

"Our Chinese manufacturing clients are struggling to decide whether they should continue investing in China or move production to other areas like Southeast Asia," said Shuji Murakami, a Yaskawa senior managing executive officer.

Harmonic Drive Systems, a Tokyo-based maker of precision reduction gears used in industrial robots, said that orders fell roughly 60% in the July-September quarter because "companies seem to have held off on capital investment in China due to such factors as trade frictions."

"Orders started to fall in June from concerns about the U.S.-China trade war," said Yoshiharu Inaba, chairman and CEO of robot maker Fanuc.

Dull growth in the world's second-largest economy will present headwinds for the global economy. China is expected to be responsible for 27% of global gross domestic product growth this year, compared with 20% from 2005 to 2006, according to estimates from Toru Nishihama, chief economist at the Dai-ichi Life Research Institute.

"There will be a significant impact on the world economy if Chinese growth weakens," he said.