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A worker loads copper cathodes into a warehouse near Yangshan Deep Water Port, south of Shanghai, in March. Weak demand for Chinese goods and in the construction industry has China’s warehouses filled.


You know it's going to be a bad year for China's exporters when all manner of goods – including the kitchen sinks – are gathering dust in storerooms.

"Of course [the slowdown] is affecting us," Du Huayao, the manager at Foshan Nanhai Bigao Sanitary Ware Co. Ltd., which makes bathroom and kitchen fixtures, said in a telephone interview from his factory in Guangdong province.

"Sales this year from the foreign market have dropped from one-third to two-thirds."

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Compounding Mr. Du's woes is China's slowing property market, which has pulled down his domestic sales as well. The company has already laid off 20 of its original 50 workers and has slowed production.

"We don't even have inventory built up now. Last year we did, but this year, the business was so bad that we dared not produce too much."

As the country's economic growth slows and its exports to North America and Europe drop off, inventories of everything from iron ore and copper to cars, liquor and designer goods are growing. Chinese exports grew just 1 per cent in July.

Now, makers of home appliances are warring with each other on discounts, trying to drum up business, and manufacturers are looking desperately to emerging nations to try to fill the gap.

The overcapacity stretches from the start of the production cycle to finished goods.

The glut in commodities, fed in part by steel mills continuing production this summer despite low prices, is bad news for exporting countries like Canada. Though mills are now thought to be slowing down, the depressed prices are expected to continue along with de-stocking until at least the end of 2012, analysts say.

"From anecdotal reports we have seen inventory rising in many sectors, including coal, iron ore, steel and heavy machinery," said Janet Zhang, a macro economist at research firm GK Dragonomics. "It's a little difficult [to measure] because inventory data is not a leading indicator, it's a lag indicator … But there are no clear indications of recovery, we expect it may continue to increase for a few months.

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"It means the commodity prices will continue to decline for a few months. We don't expect a structural recovery any time soon."

Commodities aren't the only things hurting. The halls of a Gome appliance and electronics store in Beijing are empty on a Friday morning, despite the large red billboards outside advertising 35-per-cent discounts on top of an existing national rebate of 100 yuan per 1,000-yuan purchase on certain goods. They're also promising to refund customers double the difference if they find a lower price within 30 days: a common enough practice in North America, but rarely seen in China.

"We have 50 to 60 stores and they are all supplied from the same warehouses. The rumour is, we couldn't sell some things from the warehouse for months, they are just staying packed there," said a clerk inside, who did not give her name because she was not authorized to speak to media. Though Chinese shops often give discounts in the run-up to the Mid-Autumn Festival in early October, this year's sales are starting earlier and going deeper than last year's, she said.

Chinese retail sales, though still growing, were at a 17-month low in July, up 13.1 per cent year-on-year.

The number is used only as a rough guide to economic activity, since it does not take into account the huge grey market. But there are other signs of China's economic weakening. Luxury and mid-range foreign retailers are seeing sales slow, leading to lower profits for their parent groups and rising vacancy rates in retail space in China's second-tier cities.

An analysis by Reuters news service also found overcapacity in industries ranging from liquor companies and food makers to department stores.

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The auto industry has been hit too, compounded by most major cities introducing limits on the number of new car licence plates, an effort to reduce traffic and pollution. Dealerships' lots are becoming crowded with unsold cars.

"The last two months, inventory was two to three times our sales rate – I don't have this month's data yet. Last year, Beijing had no such inventory backlog," said Guo Yong, an information office manager at Beichen Yayuncun Car Trade Market in Beijing, adding that demand in Beijing is still comparatively high compared to smaller cities.

"Manufacturers have more overstock this year … This year's car prices are comparatively low, for both high-end and low-end cars. For many brands the price has been adjusted down by a few thousand to several tens of thousands of yuan less."

The growth slowdown is of major concern to Chinese policy makers, who tried desperately in the last economic crisis to make spurring domestic consumption a major platform of their economic stimulus. But given the country's weak social safety net and limited investment options, Chinese consumers are still inherent savers, amassing money and real estate in case of ill health or unemployment.

Haunted by the bad loans and overcapacity created last time, the central government has opted for a little-by-little approach this time around, using interest rate cuts and reductions in bank's reserve requirements to prod the economy back into action.

"I think this well-documented rise in inventory definitely speaks to the broad weakness we've experienced over the last nine months or so. There's been no doubt the economy has slowed significantly, it's a question of when it's going to bottom out," said Alistair Thornton, China economist for research group IHS Global Insight, who said the government is close to its goal of stabilizing the economy.

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"I wouldn't say the hard landing fears are misplaced because the economy is not looking very good at all. But the government has managed to avert disaster in the short-term … It's going to continue to look pretty bearish for the next few months."

A partial saving grace for Chinese exports may be found in modestly growing demand from emerging economies. This year even Christmas tree and decoration sales to North America and Europe have slid, to the chagrin of their manufacturers, who have a limited market for such items at home. But for them there has been a saviour: a rising demand from South America for holiday baubles.

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