Chinese factories may manufacture deflationary, low-demand recovery
• Worry remains that sustained overproduction will lead to falling prices globally, worsening trade tensions
Cexecutives worried that the rebound could falter on weak demand at home and abroad.
Justin Yu, a sales manager at
Zhejiang-based
Child Product, which makes toy scooters sold for US retailers, is among those seeing their order book improve from the depths of the coronavirus lockdown, but remain well below normal.
“We are seeing more orders coming in this month as we get closer to our normal peak season,” Yu said. “But our orders are still 40%-50% lower than last year.” The factory’s production capacity is running at about 70%-80%, and Yu is manufacturing only as orders come in to avoid a build-up in stock.
The
China’s recovering production and still dormant demand has shown up in data revealing a rise in inventories, though the latest figures show that easing. The worry remains that sustained overproduction will lead China’s factories to keep cutting prices, compounding global deflationary headwinds and worsening trade hina’s are starting hum
Pinghu disconnect tensions, again, between before eventually cut back on production and therefore jobs. factories to but are
Mijia they
“The supply normalisation has already outpaced demand recovery,” said Yao Wei, China economist at Societe Generale.
“The recovery so far is a deflationary recovery.”
Purchasing manager index
figures for May underlined the slow nature of the recovery, with the manufacturing outlook slipping back.
Given the weak export outlook, manufacturers such as
Fujian Strait Textile Technology are switching models target the home market. It used to sell 60% of its products to Europe and the US before the coronavirus wiped out those sales.
Now, Dong Liu, the company’s vice-president, is looking for opportunities at home.
“Our company have started to visit the local market to make more potential clients know about us,” he said. “Since May 26, we have been producing 24 hours every day at
full capacity. All the inventory has already been sold and we ’ re rushing to make goods.”
But the domestic strategy isn’t
While China’s consumers are largely free to resume their regular
lives as fresh virus cases slow to a trickle, they just aren’t spending like they used to.
Retail sales slid 7.5% in April, more than the projected 6% drop. Restaurant and catering receipts slumped 31.1% from a year earlier, after a 46.8% collapse in March.
In to
without their business
its
Zhenjiang, crisis executives
challenges.
Jiangsu province, Melissa Shu, an export manager for an LED car light factory, said though orders are steadily improving, there’s no sense of urgency from her clients and the outlook remains uncertain.
“We’re just making goods slowly,” Shu said. “We are worried about the coming months.”
Some producers may be
hoping for a real-life enactment of Say’s law, a part of economic theory that suggests that ultimately supply will create own demand, as long as prices and wages are flexible.
Another scenario industry self-corrects, according to UBS Group’s chief China economist Wang Tao.
She points to strong steel production during the depths of the coronavirus lockdown, even when demand was weak.
PRODUCTION DECLINE
Higher inventories mean that even as demand recovers, steel production won’t show much of a pick-up. And once producers know that orders are falling, they will adjust output. is its that
“I do not think supply will outstrip demand for long — once inventories build up, or producers
know orders are falling, production will come down as well, ” she said.
That could pose other problems though, especially unemployment rises.
Premier
Li Keqiang media conference on Thursday highlighted job creation as a critical priority for the government.
The urgency to create jobs may mean there’s even less likelihood of a shake-up of stateowned companies in the heavy industrial sectors that in the past fuelled excess production.
The disconnect as in a is already clear in data points that show, for example, stronger coal consumption by power plants and rising blast furnace operating rates by steel mills, while gauges for property and car sales are improving more slowly.
That combination will drag on China’s growth over the next months, according to economists at Citigroup.
The problem for
China’s
— is that it needs industrial sector due to its
— local and global demand to be huge output strong.
If both are weak, clearly a dire outlook.
But if local demand recovers and global demand there are still problems. it’s doesn’t,
“China’s economy is driven by demand and right now there is no demand,” Viktor Shvets, head of Asian strategy at Macquarie
Commodities and Global
Markets, told Bloomberg Radio.
A scenario in which manufacturers’ dedicated to the export market is retooled to produce home market would still lead to overproduction.
Then capacity originally for the the supply-demand mismatch would end up adding to deflationary pressures and pose fresh headwinds to economic growth, according to Bo
Zhuang, chief China economist at research firm TS Lombard.
China’s owners are hoping it won’t
For now,
come to that. factory
Grace Gao, an export manager at Shandong Pangu Industrial, which makes tools such as hammers and axes — about 60% of their goods go to Europe — is seeing orders come in as her
THE URGENCY TO CREATE JOBS MAY MEAN THERE’S EVEN LESS LIKELIHOOD OF A SHAKE-UP OF STATE-OWNED COMPANIES
clients get up and running again.
But even as things pick up,
Gao remains hesitant to call a full
recovery. “Our clients are facing unprecedented problems,” she said. “It’s still hard to estimate when we’ll get back on our feet.”