China’s Shanghai city skyline and cityscape.
Lu Shaoji |Moment | Getty Images
Beijing – From coffee to cars to real estate, China has a recurring pattern. Companies run into industry and then rely on floating discounts. It makes economists worried.
A study by Natixis, a 2,500 listed Chinese company, will strengthen how volume is growing while deflationary pressures are undermining value, Alicia Garcia Herrero, the lead economist in the Asia-Pacific, said in a webinar on Friday. “By sector, companies can be seen by companies.”
“On the surface, you control, but deep inside you are paying a high price to control,” she said. “We don’t get the revenue we need to continue.”
Reflecting the breadth of impact, consumer prices fell 0.1% in the first six months of a year ago, while producer prices at factory gates fell 2.8%, official data shows. Meanwhile, only seven of the 48 producer price subcategories rose, compared to about half of the 37 consumer price components.
That fierce, often counterproductive competition is known in China as “retirement.” The government has called for efforts to address the trends in recent policy documents to address this period.
This trend has made high tech and products more affordable for the mass market, but it underscores the concerns of a vicious cycle that forces businesses to cut more jobs.
“With the inrecession, the Chinese economy feels much colder than the headline growth suggests,” Macquarie’s head of China’s economy, Larry Hu, said in a report Thursday. He pointed out that mainland China is the slowest on record, with “share” companies expanding their labor force by only 1% in 2024.
“From a more fundamental perspective, regression is both a feature and a bug in the “Chinese model,” he said. “Large investments lead to shareholder price wars and poor returns. However, for policymakers, fierce competition helps achieve industrial upgrades and self-reliance.”
China’s push towards electric vehicles is the most obvious example, with the industry’s huge BYD offering nearly 30% discount this year, and smartphone company Xiaomi is priced more modern SUVs than Tesla’s Model Y SUVs.
US coffee giant Starbucks is struggling to sell in China, maintaining a price of around 30 yuan ($4.20) per cup.
Even commercial property owners who tried to raise prices in Beijing have faced higher vacancies, Layman Chang, managing director for northern China, told reporters Thursday. He noted that there is still an insufficient demand.
China is expected to report gross domestic product growth in the second quarter at 5.2% on Tuesday, according to a Reuters poll. This is slower than the 5.4% increase in the first quarter, but in line with the national target of approximately 5% growth per year.
However, the second half of the year will reveal a much more stressful picture, warned Jianwei Xu, senior economist at Greater China in Natixis. He also spoke at Friday’s webinar.
“We believe that profits, especially the manufacturers, are still declining,” he said. “There could be more households under stress [the second half of the year] Because finding a job is more difficult. ”
Another challenge
This is not the first time China has dealt with overcapacity, analysts point out, referring to the overcapacity of the state-controlled commodity sector about a decade ago. However, this time, the number of state-owned enterprises is less, making it even more difficult for policymakers to act.
“Private companies in overcapacity industries tend to complicate the adjustment of mergers, even with government leadership,” Morgan Stanley’s chief China economist Robin Singh said in a report Thursday.
“The economy also starts at a weaker point, so more demand-side stimulation is needed to counter the impact of supply cuts,” the report said. “However, government debt levels are already high (about 100% of GDP), which could limit their willingness and ability to take on aggressive fiscal expansion.”
China’s top leaders are expected to maintain their current fiscal stimulus packages at a high-level Politicbeau meeting later this month. Beijing raised the country’s fiscal deficit to 4% per year in March. This is an increase from 3% last year.
Weekly analysis and insights from Asia’s biggest economy in your inbox
Subscribe now
In particular, according to CNBC translations of Chinese national media, on July 1, Xi Jinping, the Chinese chief Xi Jinping led a meeting of high-level financial and economic committees that called for more governance in “low-cost, disorderly competition.”
The official Qiushi Journal of the Communist Party of China on July 1 outlined several measures to tackle the competition in folding style, promoting standardized government actions. This article cited high-level government meetings over the past few months.
“To achieve its growth target, Beijing has no choice but to launch major demand stimuli,” Hu said. “The improvement in domestic demand will then ease the price competition between material producers and internet giants. But for manufacturers, absorbing existing capabilities will be a long and painful process.”
Global Spillover
In a July 1 report, analysts at Goldman Sachs said the worsening issue with China’s resolution of domestic overcapacity is the trade war with the United States.
The US and the European Union became more critical of China’s persistent overcapacity issue last year. Both have raised tariffs, particularly on electric vehicles in China, to protect domestic automakers. In April, the US also targeted China, which was fully tasked.
According to Goldman Report, tariff escalations have made Chinese manufacturers more decisions to build factories overseas, “which could create redundant supplies over the next few years.” Analysts estimated that capacity had increased by 0.5% to 14% by the end of 2028, up from the 0.4% to 10% expansion projected a year ago.
And out of seven sectors, including air conditioners, solar modules, lithium batteries, electric vehicles, power semiconductors, iron and construction equipment, five sectors have more capacity than overall global demand, Goldman analysts said. Only ACS and EVs are barely enjoying the potential of the market.
– CNBC’s Victoria Yo contributed to this report.
