Trouble in Toyland: U.S. recession jolts China

Others found ways to cut corners, which is cited as one reason that the problem of Chinese toy safety came to a head last year. Among other things, some Chinese factories started using lead-based paint on their products because it dries faster and thereby speeds production time.

“They were either closing their eyes or closing their doors,” said Michael Zakkour, managing director of China BrightStar, a manufacturing and sourcing consultancy.

To be sure, some of the factories that were shuttered were small shops that employed only a few dozen workers. And the contraction is to some degree a natural consolidation process in an industry that is overbuilt. But big players have clearly been affected as well.

One of the most publicized cases was the abrupt closure of the Smart Union toy company in October in the city of Dongguan, the center of the toy industry. When the factory managers disappeared overnight, leaving 7,000 workers without paychecks or severance, protests erupted, targeting both the government and the publicly traded Hong Kong company. The Dongguan government finally doled out 24 million yuan ($3.5 million) to pay what was owed to the workers and settle the conflict.

“All local officials recognize that they are judged on the basis of their ability to control social unrest,” said Nicholas Lardy, a China expert and senior fellow at the Peterson Institute for International Economics. “It’s in their interest to make sure factories don’t leave town and abscond with back wages.”

In November, toy workers rioted after the Hong Kong-based Kaida Manufacturing Co. laid off 600 employees from its factories in Dongguan and tried to avoid paying compensation required by the new contract law. Local media reported that approximately 1,000 police and security guards were called in to disperse the angry crowd, but company offices were ransacked, cars overturned and at least five people were injured before order was restored. Kaida ultimately agreed to renew contracts with senior employees and offered compensation packages to others.

Reverse migration
The closures have left many migrants with no work, including 23-year-old Wu Yang, who worked at a Taiwanese-owned factory in Dongguan for three years before being laid off four months ago when the operation was shut down. Wu is considering returning to his home in central Henan province, but for now he’s killing time in local bookshops and hoping the situation will turn around.

"Maybe I will go home, but it’s boring there,” Wu said. “And I’ll just gamble all my money away."

Each day, thousands of other migrants in Guangdong and other coastal provinces board trains and buses for their home villages, leaving earlier than normal for the Chinese New Year, which begins Jan. 26. When and if they will return is anyone’s guess.

In the short term, the exodus of unemployed workers eases pressure in Guangdong and other manufacturing centers. Longer term, however, it hurts families living in the poorest parts of China, who receive money from migrant workers. That raises the prospect that the protests and violence in the manufacturing regions could spread to the interior, many China experts say.

“It’s a potentially scary scenario,” said Lawrence Delson, who teaches China business courses at New York University. “If many of these migrant workers go home, what happens to the flow of money back to the inland provinces? … There is a deepening division between the haves and the have-nots … raising the specter of social unrest.”

Mixed message
The Chinese government appears well aware of the threat and has taken action aimed at stimulating its sagging economy.

In November, Beijing announced a massive $586 billion stimulus package. Economists and world leaders praised China for putting together the most ambitious rescue package in the world, worth about 3 percent of its GDP.

Chinese leaders did not provide many details of the package, but indicated that it would include spending on infrastructure, health and education. The central purpose of the package, they said, was to spur consumption in China rather than rely so heavily on exports for growth. At a G20 meeting later that month, China also agreed with other major economies that in grappling with the crisis, all nations should avoid protectionism.

But with pressure mounting to protect jobs in its export sector, Beijing also has instituted policy that is contrary to the spirit of the G20 meeting by increasing tax rebates on thousands of export products — from toys to toasters. The rebates, and an artificially low valuation of China’s currency, essentially give its exports a competitive edge in the world marketplace, threatening to increase trade imbalances that have long caused tension.

Even Chinese officials have expressed concern that the rebate policy, which experts say covers at least 50 percent of China’s exports, could spark retaliation from trade partners, including the United States. Some trade experts warn that could spark a trade war, similar to what happened when the United States put in place high protectionist tariffs in 1930, thereby fueling the Great Depression.

“At the moment, China is the gold standard on the stimulus,” said Lardy, of the Peterson Institute of International Economics. “But I would give them very low marks for this (tax policy.) They are … basically promoting exports at the expense of the rest of the world.”

Reported by msnbc.com's Kari Huus from Redmond, Wash., and Adrienne Mong in Dongguan, China.

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