A decline in China pricing drives some exporters over the precipice

A decline in China pricing drives some exporters over the precipice

Chris Lin, the owner of a Chinese lighting company, had to choose between accepting the loss and telling his staff not to come back after the Lunar New Year after receiving the first order of the year from a close foreign client.

When a close overseas client placed his first order of the year, Chris Lin, the owner of a lighting factory in China, was confronted with a tough choice: either accept it at a loss or tell staff not to come back after Lunar New Year. Give.

Chris Lin, the owner of a lighting business in China, was confronted with a difficult decision when he got his first order of the year from a loyal overseas customer: either accept it at a loss or fire employees after the Lunar New Year. Request not to return.

After the break from February 10–17, Lin, who intends to reopen his plant in the eastern city of Taizhou at around half capacity, stated, "It was impossible for me to lose this order."

"I may have lost this client for good, endangering the lives of a lot of people. People could begin to question our company if we take too long to start producing again. If rumors get out, our suppliers' choices are influenced."

Long-term manufacturing deflation is posing a challenge to the existence of small-scale Chinese exporters who are forced to compete constantly on price to offset declining commerce as demand is suppressed by growing trade protectionism and overseas lending rates.

For the last fifteen months, producer prices have been declining, which has severely squeezed profit margins to the point that industrial output and employment are now in jeopardy and exacerbated China's economic issues, which include an asset and debt crisis.

The Commerce Ministry's 2022 data indicates that 180 million people are employed in occupations connected to exports.

According to Raymond Yang, chief China economist at ANZ, addressing deflation need to take precedence over achieving this year's projected growth objective of about 5%.

Report this advertisement

"Companies reduce product prices, then employee wages," he said. Then buyers won't make purchases; this might create a vicious cycle."

China's industrial enterprises had a 2.3% fall in profits last year, with a 4% decline in COVID-19 impacted companies. According to an official survey, manufacturing activity declined in January for the fourth consecutive month, while export orders declined for the tenth consecutive month.

This indicates to Lynn that the $1.5 million purchase this client made was 25% less than a comparable order from the previous year. This was 10% cheaper than the cost of manufacture.

Analysts claim that slowing exports indicate a need for authorities to take a backseat, making it even more critical to boost domestic consumption in order to meet the growth objective.

"The downward pressure on prices and margins will dissipate faster the more'rebalanced' growth is," according to S&P Global's head economist for Asia-Pacific Luis Kuiz.

"Rat race"

Concerns about overcapacity and deflation are being raised by China's decision to shift financial resources from consumers to production, particularly in rapidly expanding luxury industries like electric automobiles.

Because of the sensitivity of the situation, the executive at an automobile molds manufacturer in eastern Zhejiang province, who wished to remain anonymous, anticipates the company's output and exports to increase but profitability to decrease. The executive describes the business as being in a "rat race" with increasing rivalry.

Banks are luring industries with low-interest loan offers as China's central bank adds liquidity to the banking system to promote development.

But since they are under pressure from bigger competitors, smaller businesses are less inclined to take on debt to fund new ventures, which analysts see as a flaw in China's monetary policy, which is becoming more and more ineffective.

According to state authorities, private enterprises account for 80% of urban employment; their investment decreased by 0.4% in the previous year, while state investment increased by 6.4%.

"I get a lot of calls from bank managers who are worried when they can't lend money," e-commerce textile exporter Miao Yujie said.

Larger competitors pulled him out of the market, and even when he cut his personnel to roughly 20 workers last year, he was still unable to turn a profit.

Miao added, "But you only need to borrow if you want to expand," and hinted that he was thinking about shutting down his company.

This period is distinct.

In 2015, China had a deflationary crisis as well due to overcapacity in core sectors like steel, which were mostly controlled by state-owned businesses. In order to relieve supply and increase demand, authorities slashed these enterprises and accelerated the building of infrastructure and assets.

The excess in the private sector has increased this time around, according to Ni Wen, economist at Huabao Trust, who mentioned manufacturers of equipment, chemicals, and electronics. Large numbers of people are employed by these businesses, which is a touchy subject for Chinese officials.

"So it is difficult to reduce supply, so more frequently efforts should be attempted on the demand side this year," Ni said.

Even while some are hesitant to slash positions, factory owners claim there is a lot of pressure to do so.

Yang Bingben, whose firm, located in the eastern city of Wenzhou, produces industrial valves, said he considered shutting the business but decided to continue it out of gratitude for his staff, the majority of whom are retired. are almost there.