Chinese exporters, particularly small and medium-sized enterprises (SMEs), are grappling with a perilous situation as tumbling prices and prolonged factory deflation threaten their viability. The relentless price wars for diminishing business, coupled with global economic challenges, are pushing many to the brink, jeopardizing industrial output and employment.
Kris Lin, the owner of a lighting factory in Taizhou, faced a dilemma when confronted with an order from an overseas client. He had to choose between accepting the order at a loss or suspending production after the Lunar New Year. Lin opted to resume production at half capacity after the holiday break, emphasizing the significance of retaining clients to safeguard livelihoods.
Prolonged factory deflation, marked by a 15-month decline in producer prices, is putting significant strain on Chinese exporters. The ongoing price wars, influenced by higher interest rates abroad and increased trade protectionism, are squeezing demand, leading to a dire situation for smaller enterprises.
Raymond Yeung, Chief China Economist at ANZ, asserts that tackling deflation should take precedence over achieving targeted growth, emphasizing the potential vicious cycle of companies cutting prices, reducing staff salaries, and subsequently discouraging consumer spending.
Chinese industrial profits experienced a 2.3% decline in the past year, compounding the challenges following the COVID-hit 2022. Official surveys reveal a contraction in manufacturing activity for the fourth consecutive month in January, coupled with a ten-month decline in export orders.
Smaller exporters are feeling the brunt of this economic downturn. The rat race intensifies as banks, responding to central bank liquidity injections, offer cheap loans to manufacturers. However, smaller firms, facing stiff competition from larger counterparts, are reluctant to take on loans for fear of being edged out of the market.
The Chinese government’s focus on channeling financial resources into the manufacturing sector rather than consumers has exacerbated overcapacity and deflation concerns. Even booming sectors like electric vehicles are not immune to the challenges, as exemplified by an automotive molds factory in Zhejiang, describing the industry’s competition as a “rat race.”
While a similar deflationary scare occurred in 2015, the current scenario is marked by a surplus in the private sector, particularly in electronics, chemicals, and machinery manufacturing. The delicate balance between shrinking supply and boosting demand becomes critical, especially given the sensitivity of these sectors, which employ large numbers of people.
As deflationary pressures persist, economists stress the importance of addressing the demand side, urging policymakers to stimulate household consumption. For factory owners like Yang Bingben, whose industrial valve company in Wenzhou faces an uncertain future, decisions on survival hinge on navigating through the challenges of this economic downturn.
The resilience and adaptability of China’s export sector, particularly its SMEs, will be critical in navigating the complex economic landscape and emerging stronger from the current challenges. As China seeks to strike a balance between maintaining economic stability and addressing deflationary pressures, the global economic community closely watches the outcomes and potential policy shifts in the world’s second-largest economy.
