The locality of 710,000 in prosperous Zhejiang province arranged 1.5 billion yuan (S$317 million) in aid to let Zhejiang Hualian Sunshine Petro-Chemical Co, a major producer of purified terephthalic acid (PTA), used to make polyester, restart output after financial difficulties had shut it down.

The virtually unprecedented offer of government money to a non-state firm highlights how far the global economic downturn has spread, from small exporters that bore most of the initial brunt to bigger companies in more basic industries.

'We had to bail out Hualian Sunshine even though it was privately held,' a Shaoxing municipal government official, who declined to be named due to briefing rules, told Reuters.

'Hualian Sunshine is the biggest supplier to our textile industry, which gives us half of our fiscal revenue. The stakes were just too high for us to sit there and let it die.'

Signs of problems with China's export-driven economy started in the coastal south, where hundreds of small-scale toy makers and garment firms were forced out of business as the global financial crisis battered their main markets in Europe and the United States.

Many had initially blamed currency appreciation. But anaemic annual growth of 5.4 per cent in China's industrial output in November, the worst reading in nearly 10 years, showed the problem has gone far beyond the yuan's rise, which anyway came to a virtual halt in mid-July.

Trouble upstream
A number of upstream suppliers in eastern China's industrial heartland, such as Sinopec Yizheng Chemical Fibre Co and Nanjing Chemical Fibre Co, slipped into losses in the third quarter as their order books dried up.

One hard-hit industry has been chemicals, including makers of polyester, a synthetic resin widely used in clothing and a variety of plastic goods.

'Due to the severe situation facing the downstream business and slowing demand, the domestic polyester industry is in an extremely difficult operating environment,' Sinopec Yizheng said in its quarterly financial report.

That reflects a severe slowdown in exports of clothing and accessories, which grew just 3.1 per cent year-on-year in the first 11 months of this year compared with a 22.2 per cent rise in the same period of 2007, official data showed.

Industry analysts expect the situation to get worse next year along with the faltering global economy, forcing some smaller suppliers out of business.

'It's a domino effect. If the garment exporters continue to fall one after another, how can you expect their upstream suppliers to stay in the business?' said Mr Gao Guo, an analyst with Huatai Securities.

'Industry-wide consolidation is inevitable next year as there is no sign of an end to the global financial crisis.'

Hualian Sunshine's problems, in a fitting reflection of the global financial crisis, were due in part to losses in PTA futures trading, the Shaoxing government official said.

The firm made an overall net loss of 1.17 billion yuan on sales of 10.93 billion yuan in the first three quarters, according to China Union Holdings, which owns a 16.4 per cent stake in the company after the bailout. Shaoxing county holds a 33.44 per cent stake.

Bailing out
When the economy was booming early this year, losses of that scale were not necessarily life-threatening for PTA suppliers such as Hualian Sunshine, but with their downstream customers in trouble, any serious missteps can be fatal.

A China Union spokesman said Hualian Sunshine halted production in early October but was able to restart about a month later after the bailout, which included funds from the county and another local company.

'A lot of firms, especially privately run family businesses, have management problems and are sometimes involved in irregular dealings for quick profit. The weak economy has now exposed some of the skeletons, ' said Mr Qian Xiangjing, an analyst with CITIC-Kington Securities.

In recent months, Beijing has unveiled a series of measures, including export tax rebates for exporters of textiles and other goods, as well as a 4 trillion yuan fiscal stimulus package and repeated interest rate cuts.

The central government is determined to maintain at least 8 per cent economic growth in 2009, a level it said it must achieve but which foreign economists have said could prove elusive.

The local authorities, for their part, are not willing or able to wait until nationwide policies have an impact.

After nursing Hualian Sunshine back to health, the Shaoxing government is now considering lending a hand to another troubled PTA maker, Zhongheng Group, whose businesses also include steelmaking and property.

One option is a roughly 150 million yuan government aid package for Zhongheng in exchange for some of its property assets, the Shaoxing government official told Reuters.

'We are still discussing ways to help out Zhongheng. I am afraid we might have to intervene when other big taxpayers here fall apart. What else can we do?' asked the official. -- REUTERS