China’s tumbling prices push some exporters to the brink

BEIJING/HONG KONG – When Mr Kris Lin, who owns a lighting factory in China, received 2024’s first order from a close overseas client, he faced a distressing choice: take it at a loss, or tell workers not to come back after the Chinese New Year.

“It was impossible for me to lose this order,” said Mr Lin, who plans to restart 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.”

Prolonged factory deflation

is threatening the survival of smaller Chinese exporters that are locked in relentless price wars for shrinking business as higher interest rates abroad and rising trade protectionism squeeze demand.

Producer prices have been falling for 15 straight months, crushing profit margins to the point where industrial output and jobs are now at risk and compounding China’s economic woes, which include a property crisis and debt crunch.

About 180 million people work in export-related jobs, Chinese Commerce Ministry data from 2022 shows.

ANZ chief China economist Raymond Yeung says fixing deflation should be a higher policy priority than reaching the expected growth target of around 5 per cent for 2024.

“Companies cut product prices, then staff salaries. Then consumers won’t buy – this could be a vicious circle,” he said.

Profits at China’s industrial firms fell 2.3 per cent in 2023, adding to the 4 per cent drop in Covid-19-hit 2022. An official survey showed manufacturing activity contracting for a fourth straight month in January, while export orders shrank for a 10th month.

For Mr Lin, that has meant the US$1.5 million (S$2 million) order his client placed was 25 per cent below a similar one in 2023. It was 10 per cent below production cost.

Sluggish exports mean policymakers need to pull other levers to reach their growth target, increasing the urgency of stimulating household consumption, analysts say.

“The more ‘rebalanced’ growth is, the faster that downward pressure on prices and margins will dissipate,” said Mr Louis Kuijs, Asia-Pacific chief economist at S&P Global.

‘Rat race’

China has been funnelling financial resources into the manufacturing sector, rather than consumers, exacerbating overcapacity and deflation concerns, even in booming higher-end sectors, such as electric vehicles.

An executive at an automotive moulds factory from the eastern Zhejiang province, who asked not to be named due to the sensitivity of the matter, expects the firm’s output and exports to rise but earnings to fall, describing the intensifying competition in the industry as a “rat race”.

As China’s central bank unleashes liquidity into the financial system to spur growth, banks are chasing factories with cheap loan offers.

But squeezed out by bigger rivals, smaller firms are unwilling to take on loans to finance new business, in what economists see as a broken link in China’s increasingly inefficient monetary policy.

Investment by private companies, which, according to state officials, provide 80 per cent of urban jobs, dropped 0.4 per cent in 2023, while state investment rose 6.4 per cent.

“Many bank managers call me and they sound very anxious when they can’t lend money,” said Mr Miao Yujie, an e-commerce clothing exporter.

Even after halving his workforce to about 20 people in 2023, he cannot turn a profit as bigger firms elbow him out of the market.

“But you only need to borrow when you want to expand,” said Mr Miao, adding that he is mulling over closing his business.

This time is different

China also went through a deflationary scare in 2015, when it faced overcapacity in primary industries, such as steel, dominated by state-owned enterprises. The authorities downsized these companies to reduce supply and accelerated infrastructure and property construction to boost demand.

“This time, it’s more of a private sector surplus,” said Hwabao Trust economist Nie Wen, singling out electronics, chemicals and machinery makers, which 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.”

Factory owners say the pressure to cut jobs is intense, even if some are reluctant to do so.

Mr Yang Bingben, whose company makes industrial-use valves in the eastern city of Wenzhou, said he has thought of shutting down the business, but keeps it running as he feels indebted to his workers, most of whom are close to retirement age.

Still, he does not know how long the factory can survive.

“This year will be the best of the next decade,” Mr Yang said. REUTERS