China’s exporters find themselves at a crossroads as prolonged factory deflation takes a toll on profit margins

China’s exporters, particularly smaller enterprises, are confronted with a critical juncture as prolonged factory deflation takes a toll on their profit margins. The challenging landscape of fierce price wars, diminishing business opportunities, higher interest rates abroad, and growing trade protectionism has forced many exporters, especially smaller ones, to grapple with difficult decisions.

According to Kris Lin, the owner of a lighting factory, the intense price competition has created a dilemma where losing orders becomes untenable. This not only affects individual businesses but also poses a significant threat to China’s broader economic landscape. Smaller exporters in China are finding it increasingly challenging to survive amid the relentless price wars, with producer prices experiencing a continuous decline for 15 consecutive months. This sustained downturn in prices has had a severe impact on profit margins, putting industrial output and jobs at risk. The economic challenges are further compounded by existing issues, such as a property crisis and a debt crunch.

Raymond Yeung, Chief China Economist at ANZ, underscores the urgency of addressing deflation as a higher policy priority than achieving expected growth targets. He warns of a potential vicious cycle where companies resort to cutting prices, leading to salary reductions for staff and subsequently hampering consumer spending. The persisting deflationary pressures on China’s exporters warrant strategic attention and intervention to prevent adverse consequences for the broader economy.