The prolonged deflationary trend in Chinese factories poses a significant threat to the viability of smaller exporters, who find themselves engaged in an ongoing struggle to sustain their operations and remain competitive in the market.
For the past 15 months, Chinese producer prices have experienced a continuous decline, exerting immense pressure on profit margins. This downward spiral has reached a critical point where the very foundations of industrial production and employment opportunities are now endangered, further exacerbating the economic challenges faced by the nation.
To fully comprehend the magnitude of this phenomenon, it is essential to acknowledge that approximately 180 million individuals in China are employed in roles directly linked to the export sector, underlining the far-reaching implications of the ongoing deflationary trend.
In the fiscal year 2023, profits of Chinese industrial enterprises experienced a notable decline of 2.3 percent. This decline had tangible repercussions for business owners like Kris Lin, who oversees a lighting factory.
For Lin the stark reality was evident when a client's order, valued at $1.5 million, reflected a 25 percent reduction compared to similar orders from the previous year.
Moreover, this order fell a significant 10 percent below the actual production costs, highlighting the dire financial challenges faced by manufacturers.
The sluggish pace of exports necessitates a strategic shift in policymaking, compelling authorities to explore alternative avenues to achieve their growth targets. This urgency underscores the need to prioritize initiatives aimed at stimulating household consumption as a means of revitalizing economic momentum.
Louis Kuijs, chief economist for Asia-Pacific at S&P Global, emphasizes the correlation between sustainable growth and the alleviation of pressure on prices and profit margins.
Raymond Yeung, serving as the chief economist for China at ANZ, advocates for prioritizing the resolution of deflation over the pursuit of anticipated economic growth targets, which hover around 5 percent for the current fiscal year.
Yeung underscores the detrimental impact of deflation on consumer behavior, cautioning against the formation of a vicious cycle where declining prices lead to reduced wages and subsequently dampened consumer spending.
Presently, China's allocation of financial resources predominantly favors the manufacturing sector over consumer-oriented initiatives, intensifying concerns regarding overcapacity and deflationary pressures.
This imbalance persists despite robust growth in upscale sectors such as electric vehicles, signaling the need for a more balanced approach to economic policymaking.
Reflecting on China's previous encounter with deflation in 2015, characterized by overcapacity in key industries like steel, the government responded with measures aimed at curtailing supply and stimulating demand through infrastructure and real estate development.
However, the current challenge primarily stems from overcapacity in the private sector, notably in industries such as electronics, chemicals, and machinery, which are significant employers and pivotal to China's economic landscape.
In light of these circumstances, economist Nie Wen from Hwabao Trust emphasizes the difficulty in addressing supply-side issues, suggesting a greater emphasis on bolstering demand as the focal point of economic revitalization efforts in the coming year.
06.02.2024
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