China factory orders shrink in ominous sign for global outlook

Chinese manufacturers will find it difficult to make up for the overseas shortfall in their home market. PHOTO: AFP

BEIJING (BLOOMBERG) - Investors wanting to gauge the health of global consumer sentiment should look no further than China's factories right now.

Makers of goods ranging from Christmas decorations to clothing and tents say orders from overseas customers are drying up, with some predicting that the best they can aim for is flat demand versus last year, according to more than a dozen export managers interviewed by Bloomberg News.

The snapshots from factories in key Chinese hubs indicate that households worldwide, already tightening their belts to contend with a rapid rise in the cost of living, may be cautious for longer and add weight to warnings about a potential global recession.

"Consumers do not have the money to spend with soaring inflation," said Ms Wendy Ma, marketing manager at a textile maker in the eastern city of Ningbo, adding that the decline in demand happened suddenly.

Orders for items including buttons, zippers and sewing thread dropped about 30 per cent in July and August from a year earlier as demand from major markets like the United States and Europe declined, she said.

The reports from manufacturers suggest that the resilience being seen in China's export data may fade. That said, the boom has been somewhat helped by price inflation as well as Chinese manufacturers making up for delays from pandemic lockdowns and orders that were brought forward in the light of ongoing supply chain distortions.

"The general direction is that export growth will slow down in the coming months, and it is possible to reach a negative territory by the end of the year," said Dr Larry Hu, head of China economics at Macquarie Group.

Still, the decline in demand for China-made goods will be gradual, instead of a collapse, he added.

Headwinds have been slowly building for months. Mr Clark Feng, whose Vita Leisure buys tents and furniture from domestic manufacturers to sell overseas, said export orders have been dropping since March and European clients are asking to buy only about 30 per cent to 50 per cent of what they wanted last year. Workers in some of the factories he sources from have been laid off or sent on vacation, something he has not seen in his decade in the industry.

Overseas clients are looking to clear their existing inventories instead of ordering new products, Mr Feng said. "Our products were very popular last year and now, we swing from one extreme to another extreme and the demand is even lower than pre-pandemic. There is a sense of panicking."

Bloated stockpiles

Over the last year, inventories at companies in the S&P consumer-discretionary and consumer staples indexes rose by US$93.5 billion (S$128.2 billion), a 25 per cent increase, according to data compiled by Bloomberg. That came after companies bulked up purchases in 2021 to cope with lengthy shipping delays, and as some front-loaded their Christmas orders.

It has also coincided with a shift in global consumer spending towards services, rather than goods, as travel demand picks up in many parts of the world. Retailers such as Walmart and Target are slashing the prices of merchandise such as apparel and home goods, even as they charge more in other categories amid soaring US inflation.

Many retail buyers need to lock in orders in advance, meaning a downturn now is a sign that consumer demand may be weak for months, according to some firms.

Mr Joe Kwok, general manager at Shanghai-based textile and garment manufacturer Hengda Printing & Dyeing, said his top sportswear and retail clients have cut orders by as much as 30 per cent since June. He forecasts that demand will remain low for a year or two.

Chinese manufacturers will find it difficult to make up for the overseas shortfall in their home market. The country's adherence to Covid-19-zero, which includes sudden lockdowns, constant testing and movement curbs, has weighed on consumer sentiment and wrought havoc on the manufacturing sector.

Yiwu, the world's biggest hub for Christmas goods ranging from tree ornaments to plastic reindeer, shows how precarious business can be.

Over the weekend, the city extended a lockdown that continues to ban most residents from leaving their homes, as the outbreak that started this month topped 630 infections. The city was also locked down in April, but the latest restrictions are a major setback for manufacturers in the middle of what is usually their busiest season for production and shipping.

Exporters have learnt from previous disruptions, and brought forward their delivery schedule by a month or more in anticipation of uncertainties, according to Mr Cai Qinliang, secretary-general of the Yiwu Christmas Products Industry Association, which has 200 members that own 500 to 600 factories.

But it is not enough to support a full recovery. Mr Cai said that Christmas-related business was slashed by more than half in 2020 as the pandemic threw the global trade into disarray and major customers cancelled orders. Sales improved last year, though were still 20 per cent to 30 per cent lower than before the pandemic, and may hold at that level this year, he said.

It is a situation echoed 400km to the north, where Ms Melissa Shu says she has gone from working overtime last year at a manufacturer of LED car lights in the city of Zhenjiang to facing an order book that has fallen by at least a third.

"(Clients) are acting with a great deal of caution," said the export manager. "The macro-economic environment is dim - the war, the inflation, the living crisis. None of us can escape."

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