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Anti-vice crackdown on China's 'sin city' takes extra toll as economy slows

By Clare Jim and Yimou Lee

HONG KONG (Reuters) - A crackdown on a once-thriving sex trade in China's factory of the world will come with a significant economic cost for the city of Dongguan's local government, which relies heavily on the entertainment industry for tax revenues.

Dongguan, a sprawling manufacturing base in the Pearl River Delta that has also been dubbed "sin city", has already been grappling with an economic slowdown and higher operating costs that have seen scores of factories close or move to cheaper locations inland or to countries such as Vietnam, Cambodia or Bangladesh.

In February, the city's second engine of growth was hit hard when more than 6,000 police officers launched anti-vice raids, arresting about 1,000 people and hitting businesses across the board, from hotels, massage parlors and karaoke bars to taxi drivers and retailers.

"Manufacturing is unlikely to recover and the service industry has been hurt, so Dongguan's economy in the first quarter should not look good," said Qun Liao, chief economist at China Citic Bank International. "If there's no manufacturing, there's no one to enjoy the services."

The raids are expected to result in some 50 billion yuan ($8 billion) in losses for businesses in the city, according to the official Xinhua news agency.

An agricultural backwater town until the late 1980s, Dongguan was transformed into one of the world's most important manufacturing hubs as China boomed, producing everything from electronics and garments to furniture and toys.

GOVERNMENT COFFERS HIT

Persistent weakness in China's manufacturing sector has reinforced fears of a sharper-than-expected slowdown at the start of 2014, and some government economists think national authorities have already started boosting spending to put a floor under growth.

The economic slowdown and vice crackdown have cast doubt over Dongguan's ability to reach its 2014 economic growth target of 9 percent, a far cry from its heady annual growth rates of up to 23 percent.

In a city where the local government gets the lion's share of taxes from the service industry, as opposed to the 25 percent share it gets from the manufacturing sector, the impact from the anti-vice crackdown on local coffers is cause for concern.

Dongguan's gross domestic product reached 520 billion yuan in 2013, with tax revenues of over 30 billion yuan, said Lin Jiang, head of Public Finance and Taxation Department of Lingnan College at Sun Yat-sen University in the southern province of Guangdong, where the city is located.

Of that, an estimated 3.6 billion yuan came from the entertainment business, he told Reuters, adding that the impact from the crackdown would extend across the board.

"The first impact from a slump in hotel business is a drop in business tax, so local government's revenue drops. Other industries that benefit from the hotel business, such as food and restaurants, fashion, jewelry, retail, which all contribute to value-added tax, are also hurt," Lin said.

LIGHTS ON, NOBODY HOME

On a visit to Dongguan last week, the combined impact of the economic slowdown and recent raids was clear.

By 7 p.m., bright, neon signs dangling from low-rise hotels, karaoke lounges and bars lit up Swan Lake Road, among the most bustling streets in the town of Changping, but there were few customers or bar girls to be seen.

"Business is quiet nowadays. Police come and inspect three times a week," said a bartender in one of the biggest clubs in town. He declined to be identified due to the sensitive nature of his business, as the crackdown continues.

Changping is close to a train station that links, in just over an hour, directly to the Asia financial centre of Hong Kong, helping to fuel its vibrant sex and entertainment industry that caters in large part to travelling businessmen.

Chinese media reports have estimated that at least 300,000 people are employed in Dongguan's sex industry and that it contributes about a tenth of the city's revenue.

In the industrial area of Changping, many empty factories had bright yellow signs plastered on shuttered gates advertising them for rent.

A factory owner from Hong Kong said the Changping industrial park had seen just 20-30 percent occupancy rates since it opened five years ago, with most tenants local textile companies.

In Houjie, another factory town in Dongguan hit hard by the anti-vice crackdown, many hotels offered steep discounts, while others had been forced to close along with karaoke bars.

Taxi drivers and cosmetics salespeople said revenue had dropped by 50-60 percent.

"I hope the prostitutes come back," said the owner of one cosmetics retailer.

($1 = 6.2122 Chinese Yuan)

(Reporting by Clare Jim and Yimou Lee; Writing by Anne Marie Roantree; Editing by Kim Coghill)

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