Continued Factory Deflation Threatens Survival of Chinese Exporters

Summary

  • Persistent deflation in China’s factories threatens small local exporters who are engaged in continuous price battles as international demand is affected by high foreign interest rates and increasing trade protectionism.
  • With industrial output and jobs now in jeopardy, the 15-month decline in producer prices is exacerbating China’s economic challenges.
  • Analysts suggest that the focus on stimulating household consumption to achieve growth targets is becoming more pressing due to weak exports.
  • The country needs to direct financial resources towards the consumers, mitigating overcapacity and deflation concerns.
  • Competition in the industry has been described as a “rat race” impacting profit margins despite rising output and exports.
  • Smaller firms, however, are hesitant to borrow despite lower loan offers from banks eager to increase their lending.
  • China must address the supply-demand imbalance, particularly in the private sector, comprising electronics, chemicals, and machinery manufacturers which are vital employment sectors.

The Dilemma in Chinese Factories

“Winning this order was crucial for me,” shared Lin, who is set to revive his factory in Taizhou, an eastern city, at approximately half its capacity following the Feb. 10-17 holiday. “Missing out on this opportunity could have cost me a permanent client and jeopardized numerous livelihoods if people begin questioning our business, leading to supplier apprehensions.”

Struggle of Smaller Exporters

Chronic factory deflation puts the existence of smaller Chinese exporters at risk. As they grapple with unabating price battles due to dwindling business, increased foreign interest rates and rising trade protectionism further squeeze demand. This happens while producer prices have plunged for 15 months, eroding profit margins and jeopardizing industrial production and jobs, aggravating China’s economic tribulations.

The Impact of Falling Prices

Raymond Yeung, ANZ’s chief China economist, views rectifying deflation as a more urgent policy priority than achieving the anticipated 5% growth target for this year. He states, “A vicious cycle ensues when firms cut product prices and staff wages, resulting in consumers avoiding purchases.”

Impact on Private Firms

Despite efforts poured into manufacturing and financial support from banks, smaller firms, squeezed out by bigger rivals, are unwilling to borrow to finance growth, impacting the effectiveness of China’s monetary policy.

Focusing on Demand

Economist Nie Wen from Hwabao Trust points out that the private sector surplus involving electronics, chemicals, and machinery makers, which employ a significant number of people, can’t be easily reduced, making it essential to concentrate on boosting demand this year.

The Future of Chinese Factories

Factory owners are under intense pressure to cut jobs but are also hesitant. Yang Bingben, who owns a valve manufacturing company, remains operational out of loyalty to his ageing workforce, even if the business’ continuity is uncertain.

The economic circumstances impacting China’s factories and smaller exporters influence global trading, particularly forex. The yuan’s performance is affected by these conditions, with forex traders closely watching developments in China’s manufacturing and economic landscape.

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