Written by Ellen Chan and Marius Zaharia
BEIJING/HONG KONG (Reuters) – When Chris Lin, who runs a lighting factory in China, receives his first order of the year from a close overseas customer, he doesn't know whether to accept it or tell his workers not to come anymore. I was forced to make a difficult choice. After Chinese New Year.
“It was impossible for me to lose this order,” Lin said. He plans to reopen the factory in the eastern city of Taizhou at about half its capacity after the February 10-17 holiday.
“We could lose this customer forever and many people's livelihoods would be at risk. If we delay restarting production, people may start to doubt our business. If it becomes widespread, it will influence supplier decisions.”
Prolonged factory deflation threatens the survival of China's small exporters, who are locked in a relentless price war as rising overseas interest rates and rising trade protectionism squeeze demand.
Producer prices have fallen for 15 consecutive months, squeezing profit margins to the point where industrial production and employment are at risk, exacerbating China's economic woes, including the real estate and debt crises.
According to 2022 data from the Department of Commerce, approximately 180 million people are employed in export-related jobs.
Raymond Yong, ANZ's chief China economist, said combating deflation should be a higher policy priority than achieving the expected growth target of around 5% this year.
“Companies lower the price of their products, then lower the salaries of their employees, and then consumers stop buying. This can become a vicious cycle,” he said.
Profits at Chinese industrial companies fell by 2.3% last year, on top of a 4% decline in 2022 due to the impact of the coronavirus. Manufacturing activity contracted in January for the fourth consecutive month, and export orders fell for the 10th consecutive month, according to an official survey.
For Lin, that means the $1.5 million order the client placed was 25% lower than a similar order last year. 10% lower than production cost.
Analysts say weak exports mean policymakers need to pull other measures to meet growth targets, increasing the urgency to stimulate household consumption.
“The more we 'rebalance' growth,” said Louis Cuis, chief economist for Asia Pacific at S&P Global, the sooner downward pressures on prices and margins will be lifted.
'Rat Race'
China is pouring money into manufacturing rather than consumers, exacerbating overcapacity and deflation concerns even in fast-growing luxury goods sectors such as electric cars.
An executive at an auto mold factory in eastern Zhejiang province, who asked not to be named due to the sensitivity of the matter, said he expects the company's production and exports to increase, but profits to decline, and that the industry's competition is increasing. “We are in a critical situation,” he said. “Rat race.”
Banks are chasing factories with offers of cheap loans as China's central bank pumps liquidity into the financial system to boost growth.
But squeezed by larger rivals, small and medium-sized enterprises are reluctant to take out loans to finance new ventures, and economists see this as a disconnect in China's monetary policy that is increasing inefficiency. .
Investment by private companies, which provide 80% of urban jobs, fell 0.4% last year, while state investment increased 6.4%, state officials said.
“Many bank managers call me and they sound very anxious when they can't lend money,” said Miao Yujie, an e-commerce clothing exporter.
Even after cutting his workforce in half to about 20 people last year, he can't turn a profit because major companies have cut him out of the market.
“But we only need to borrow money when we want to expand,” Miao said, adding that he was considering closing the business.
Not this time
China also experienced deflation in 2015 and faced overcapacity in primary industries such as steel, which are dominated by state-owned enterprises. Authorities have cut back on these companies to reduce supply and accelerated construction of infrastructure and real estate to increase demand.
“This time it's more of a private sector surplus,” said Nie Wen, an economist at Fabao Trust, pointing to electronics, chemical and machinery manufacturers. These companies employ large numbers of people and are a sensitive area for Chinese policymakers.
“Therefore, more efforts are needed on the demand side this year because it is difficult to reduce supply,” Nee said.
Factory owners say the pressure to cut jobs is strong, even if some are reluctant to do so.
Yang Bingbeng, who runs a company that manufactures industrial valves in the eastern city of Wenzhou, considered shutting down his business, but he feels indebted to his employees, most of whom are close to retirement age. , said it continues to operate its business.
Still, it is unclear how long the factory will survive.
“This is going to be the best year in the next 10 years,” Yang said.
(Additional reporting: Qiaoyi Li, Graphics: Kripa Jayaram, Editing: Sam Holmes)
