S'pore firms in China fret over costs but remain upbeat

SINGAPORE - Singapore companies with a presence in China are concerned about the country's rising costs and slowing economy but remain optimistic about its longer-term prospects.

Mounting concerns over a possible credit crunch in China are fuelling worries that the world's second largest economy will continue to lose steam.

Two weeks ago, the People's Bank of China did not intervene to ease an unprecedented liquidity crunch, allowing interest rates in the interbank market to shoot up to as high as 30 per cent.

In a country where double-digit economic expansion was previously the norm, the inaction by the central bank was seen by many as a clear sign that China's new leaders are willing to undertake economic reforms at the expense of growth.

Singapore companies told The Straits Times that the slowing economy is beginning to crimp their near-term bottomlines.

Armstrong Industrial's deputy chief executive Steven Koh said sales in China for the company's electronics business, which tends to be sensitive to economic cycles, were down 10 per cent in the first quarter, compared to the same period last year.

Armstrong Industrial has eight factories in China producing electronic components and automotive foam products.

Similarly, Mr Chris Leong, managing director of Leung Kai Fook (Guangdong) Medical, said the company's agents and retailers have reported "sluggish" product sales in recent months.

The company makes and distributes Axe Brand Medicated Oil and other pharmaceutical and health-care products in China.

Besides expected slower growth, Singapore companies on the mainland are facing rising costs across the board.

"It's definitely getting more expensive to do business in China... inflation is an issue and wages have also been going up," said Armstrong's Mr Koh.

Leung Kai Fook's Mr Leong said the company has faced a 10 per cent annual increase in labour costs over the past few years.

However, the Chinese government's move to stimulate domestic demand is beginning to have a positive impact on some Singapore companies.

The executive chairman and chief executive of AnnAik, Mr James Ow, said: "Overseas demand has been slow, but local demand in China is coming up because people now prefer quality products, which we can assure them of."

The company has two manufacturing plants in Jiangsu province.

While Armstrong's electronics segment is experiencing a slowdown in China, sales of its automotive products to premium brands in the world's largest car market have risen by at least 30 per cent in the first quarter.

Singapore companies remain upbeat about the country's longterm prospects. Leung Kai Fook's Mr Leong sounded an optimistic note, saying: "Given the nature of our business, we remain positive about our prospects in China."

Mr Lam Joon Khoi, secretarygeneral of the Singapore Manufacturing Federation, said foreign investors should be encouraged by the Chinese government's emphasis on structural and financial reforms.

"We believe the Chinese economy continues to have good prospects for Singapore businesses because of its large local demand, the rapid rate of development and the growing affluence of its population," he said.

OCBC economist Tommy Xie said the tight liquidity situation has had minimal impact on the real economy so far.

"The key focus is how long this is going to last... the impact on the real economy is not obvious yet, unless this goes on for an extended period," he said.

He added that reform is a priority of China's new leadership, which might lead to economic growth slowing further this year as the government implements aggressive policy changes.

"The new government will have higher tolerance for slower growth," he said, noting that growth projections for the year might be revised down from 8 per cent to 7.7 per cent.

chiaym@sph.com.sg

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