Early holidays point to grim outlook for China's small factories

Scores of factories in China's manufacturing heartlands have closed earlier than usual for the country's biggest annual holiday due to weak orders and rising costs, workers and owners say, suggesting a rocky outlook for a key sector of the economy.

While official trade data remains mildly positive, visits to five factory towns in coastal industrial hubs found that in some areas perhaps a third of manufacturers had already begun closing weeks before the Lunar New Year break in late January.

(Read more: China's $3 trillion local government debt stirs alarm)

In some cases anaemic orders from key markets such as the United States and Europe were blamed.

Others were being forced to curtail production because of a labour shortage, a symptom of shifting demographics, that has afflicted manufacturers for several years and many say is getting worse.

Getty Images

"Lots of people have left already. I would say around a third of the workers," said Ren Lipeng, a factory worker riding a rusty bicycle along a dusty avenue where many shops and restaurants were shuttered in Changping, southern China.

Factories in the sprawling Pearl River Delta, in southern Guangdong province, and the eastern Yangtze River Delta industrial hinterland near Shanghai - which churn out well over half of China's exports - were noticeably quieter this week than during previous visits by Reuters.

In the south, many smaller plants had closed, with a stream of migrant workers crowding train and bus stations as they headed home to inland provinces in an annual exodus for up to six weeks of unpaid leave, far longer than in previous years.

(Read more: Logo fatigue? Chinese now want understated luxury)

Balancing act

With analysts expecting China to soon announce its slowest annual economic growth rate for more than a decade, Beijing has stepped up efforts to wean the economy off its heavy reliance on investment and exports in favor of higher domestic consumption.

In December, policymakers unveiled the boldest economic and social reforms in nearly three decades to pursue that goal.

Trade, however, remains a hugely important economic engine as China attempts the difficult balancing act of maintaining its official target rate of growth at 7.5 percent while shifting the economy away from lower-end manufacturing.

ADB: We remain sanguine on China

Official export numbers showed mild growth in December.

But economists have long queried the numbers as skewed and misleading, partly given the widespread overstating of export orders as a means to bring more currency into China for speculation on the appreciating yuan.

"Business has been quite sluggish still in terms of exports, manufacturing, and most orders have been delivered," said Kevin Lai, economist at Daiwa Capital Markets in Hong Kong.

"I would be very careful reading the headline numbers because in November it was very strong at 12.7 percent but I believe much of that was inflated."

China's export growth slowed to 4.3 percent in December from a year earlier. Shipments to the United States and Europe slowed from double digits in November to just 3.9 percent and 3 percent in December respectively, official data showed.

(Read more: Can China contain its high government debt?)

Complaining bosses

At the Heng Fa Plastic products factory in the Pearl River Delta city of Dongguan, just a handful of workers were manning molding machines making frames for flat screen televisions.

Owner Huang Peijiang said orders for the Christmas holiday season had been down 30 percent compared with 2012.

"For every 100 factory owners here, I'd say 80 are struggling," he said with a shake of his head. "To be honest, when I get together with other bosses we complain so much that the leaves fall off the trees."

China exports will remain stable: Goldman Sachs

In the Yangtze River Delta town of Kunshan, those still working in some major plants, including a Foxconn facility that assembles an array of Apple products, said they had worked less overtime than last year.

"This year was pretty bleak for Foxconn," said Du Xiaoying, Manager of Hongda Labor Dispatch, one of a dozen or so tiny employment agencies across the street from the Foxconn factory. "They did not offer much overtime."

The giant factory would not close for Lunar New Year holiday until Jan. 25, though, Du and other nearby employers said.

(Read more: Here's how bad China's bad loan problem could get)

"Around Chinese New Year we hire less, but more during July-August to prepare for the high season," said Foxconn Group spokesman Louis Woo, referring to the firm's hiring at its various production facilities, not just in Kunshan.

"Speaking in terms of the whole of last year, we hired more than the previous year, and our revenue was also higher."

Tentative signs of recovery in the United States and Europe have not yet translated into a sustained upsurge in consumer demand and confidence, meaning orders to Chinese factories may remain smaller and patchier.

Interviews with half a dozen factory bosses and suppliers suggested that certain sectors, including construction materials and low-end, labor intensive industries such as toys and textiles, seem to be struggling more.

"Besides high-end electronics, the situation is bad. Toys are bad, clothing too in terms of orders," said Danny Lau, the honorary chairman of Hong Kong's Small and Medium Enterprises Association whose members run thousands of China factories.

(Read more: Top 2% of Chinese account for third of global luxury sales)

Labor bottleneck

One increasingly severe long-term challenge for Chinese manufacturing has been its shifting labor market demographics as more, better paid jobs inland mean fewer younger people migrating to coastal industrial hubs in search of factory work.

In the Pearl and Yangtze River Deltas, some expect the labor market to tighten even more after the Lunar New Year, representing a potential bottleneck for factories with fresh orders but not enough workers to cope.

"Orders aren't the biggest problem. The biggest difficulty is workers," said He Songping, a maker of plastic Christmas trees in Yiwu. "Wages have been rising by 20-30 percent a year, while the number of workers is shrinking."

Ben Schwall, President of Systems Technology Group, which exports lighting fixtures and works with around 25 factories in China, estimates since the start of January 80 percent of them have had problems with workers leaving early for Lunar New Year.

(Read more: Is China the best of a bad job?)

"They're saying: 'You know what? I can come back here any time, and I know you're going to re-hire me," he said. "'And if you don't the guy across the street's going to hire me, and that's if I even choose to come back'."