Daily Management Review

Some Chinese Exporters Are Driven To The Edge By The Country’s Plummeting Prices


Some Chinese Exporters Are Driven To The Edge By The Country’s Plummeting Prices
Kris Lin, the owner of a lighting manufacturer in China, was confronted with a difficult decision when he received the first order of the year from a close overseas client: either take it at a loss or advise employees not to return after the Lunar New Year.
"It was impossible for me to lose this order," said Lin, who plans to re-start his factory in the eastern city of Taizhou at around half its capacity after the Feb. 10-17 holiday break.
"I could have lost this client forever, and it would have endangered livelihoods for so many people. If we delay resuming production, people might start doubting our business. If rumours spread, it affects the decisions of our suppliers."
Extended manufacturing deflation poses a threat to the existence of smaller Chinese exporters who are forced to compete relentlessly on price in an effort to downsize their business while demand is being squeezed by rising trade protectionism and outside lending rates.
For the past fifteen months, producer prices have been declining steadily, smashing profit margins to the point where jobs and industrial output are now in jeopardy and exacerbating China's economic problems, which already include a property bubble and debt problems.
Export-related jobs employ about 180 million people, according to data from the commerce ministry from 2022.
According to Raymond Yeung, chief China economist at ANZ, addressing deflation need to take precedence over achieving this year's projected growth target of about 5%.
"Companies cut product prices, then staff salaries. Then consumers won't buy - this could be a vicious cycle," he said.
China’s industrial companies saw a 2.3% decline in profits last year, compounding the 4% decline in COVID-19 hit 2022. According to an official survey, export orders decreased in January for the tenth consecutive month, while manufacturing activity declined for the fourth consecutive month.
According to Lin, this meant that his client's $1.5 million order was 25% less than a comparable one from the previous year. It was 10% less expensive to produce.
Sluggish exports make it necessary for policymakers to adopt additional tools in order to meet their growth objective, which makes boosting household spending even more crucial, according to analysts.
"The more 'rebalanced' growth is, the faster that downward pressure on prices and margins will dissipate," said Louis Kuijs, Asia-Pacific chief economist at S&P Global.
Even in rising higher-end sectors like electric vehicles, China has been channelling financial resources into the manufacturing sector rather than consumers, which has exacerbated fears about overcapacity and deflation.
Due to the sensitivity of the situation, the executive at an automobile moulds manufacturer in the eastern province of Zhejiang, who wished to remain anonymous, anticipates the company's output and exports to increase but earnings to decrease. The business is becoming more and more competitive, which the executive called a "rat race."
Banks are luring industries with low-interest loan offers as China's central bank injects cash into the banking system to promote economic growth.
But as a result of being forced out by more powerful competitors, smaller businesses are reluctant to take out loans to fund new ventures, which analysts view as a flaw in China's monetary policy, which is becoming more and more ineffective.
According to state officials, private enterprises account for 80% of jobs in metropolitan areas; their investment decreased by 0.4% in the previous year, while state investment increased by 6.4%.
"Many bank managers call me and they sound very anxious when they can't lend money," said Miao Yujie, an e-commerce clothing exporter.
Bigger companies are pushing him out of the market, and he still cannot make a profit, even after cutting his staff in half to approximately 20 employees last year.
"But you only need to borrow when you want to expand," said Miao, adding he mulls closing his business.
In 2015, China experienced a deflationary crisis due to overcapacity in core industries, such steel, which were primarily controlled by state-owned firms. Authorities increased the building of infrastructure and real estate to increase demand while downsizing these businesses to decrease supply.
"This time it's more of a private sector surplus," said Hwabao Trust economist Nie Wen, singling out electronics, chemicals and machinery makers. These firms employ large numbers of people, a sensitive spot for China's policymakers.
"It is therefore difficult to shrink supply, so more effort should be made on the demand side this year," Nie said.
Even while some are reluctant to slash positions, factory owners claim there is a lot of pressure to do so.
The owner of an industrial-use valve company in the eastern city of Wenzhou, Yang Bingben, admitted that he had considered closing the company but decided to keep it going out of gratitude for his employees, the majority of whom are nearing retirement age.
Even yet, he is unsure about the factory's survival span.
"This year will be the best of the next decade," Yang said.