Hat tip to my friends over at Calculated Risk for bringing the following LA Times article to my attention, "Some owners deserting factories in china."
First, Tao Shoulong burned his company's financial books. He then sold his private golf club memberships and disposed of his Mercedes S-600 sedan.
And then he was gone.
...As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade.
Entering this global downturn, it is clear that many industries are suffering from an excess of global production capacity given declining demand. One of the things needed for the global economy to find some support is for production capacity to adjust lower to meet the new lower demand. Basically, factories need to be shut down, and the sooner the better. The fact that Chinese capacity can disappear overnight is actually a good thing for rebalancing the global economy, especially since much of the excess capacity that was built in recent years was built in China.
When these Chinese bosses disappear and their factories are shut down, that production is gone. Contrast that with the typical U.S. corporate bankruptcy. In the U.S., a troubled company files for bankruptcy "protection" and continues to produce. Typically, the stockholders are wiped out, and the bondholders are given new equity in the company in exchange for their debt. Then, the company emerges from bankruptcy, often with a production footprint not terribly different from its pre-bankruptcy days.
So, not only is it likely that zero to modest capacity was taken out of the system, but now the remaining competitors in that industry are facing this "new" old competitor which has a clean balance sheet and can more aggressively compete on price. This puts added pressure on the "survivors" who may have been fairly conservative and done everything right, but nevertheless now face a stronger competitor that would have been liquidated in a true free market. There's probably no better example of this than the U.S. airline industry.
We can bad mouth the Chinese bosses who are leaving their employees and suppliers in a bind, but at least they've found a way to quickly address the excess capacity overhang.
Disclosure: The Rubbernecker is long disappearing Chinese bosses and short the U.S. bankruptcy code.
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