Chinese Bubble Bursts

China's manufacturing contracted by the most on record last month as the global financial crisis cut demand for exports, a second survey showed. A government-backed survey released on Nov. 1 also showed a record contraction, adding to concern that the world's fastest- growing economy may slump.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies. China needs to grow in order to keep generating enough factory jobs to maintain stability in the labor market, as millions of peasants continue to pour into Chinese cities in search of work.In Jiangsu province, the government extended unemployment benefits to migrant workers laid off from ailing factories; these workers had previously been shut out of public services because they don't have residency cards.

The Guangdong provincial government in the south is scrambling to set up a special fund to compensate laid-off workers in order to "protect against some of the financial and social problems caused by such closures."

In the eastern city of Wujiang, nearly 1,000 workers from bankrupt Chunyu Textile Co. received four months' salary on Oct. 27 after they swarmed the area's four main roads to draw attention to their cause. After more than 1,000 workers for home appliance maker BEP International Holdings gathered outside the factory to protest, district officials gave them $44 each late last month. The employees were also allowed to continue living in the defunct factory's dormitories for free. The same week, the government offered three months' back pay to the 900 workers at Gangsheng, an electronics supplier, after they staged a protest at a shop near their factory.

In the neighboring city of Dongguan, the local government handed out about $3.5 million on Oct. 21 to the employees of Smart Union — which sold its toys to Mattel, Disney and Hasbro — after the 7,000 workers staged a strike.Employees became nervous when the owners slipped three months behind on salary payments. The workers occupied the factory and the surrounding streets until government officials promised them they would be paid.

China's most revered companies, whose growth once seemed limitless, have reported surprising losses in the past few days. Air China , the nation's biggest international carrier, posted its first loss in seven quarters because of declining passenger numbers and wrong-way bets on fuel prices. Bank of China, the nation's largest foreign-exchange lender, said that as credit-market losses went up, its profit growth went down to its slowest in two years.

China's leaders have made a variety of moves to try to stabilize the economy — three interest rate cuts in six weeks, new export tax rebates, reduced costs for home buyers, and billions spent on infrastructure.

"…What the government fears most is workers making trouble…" Hu said. "….no one wants to hire you because they know about the blockade and now we have a bad reputation…" Jia said.