"It was impossible for me to lose this order,"
said Lin, who plans to re-start his factory in the eastern city of Taizhou at
around half its capacity after the Feb. 10-17 holiday break.
"I could have lost this client forever, and it would
have endangered livelihoods for so many people. If we delay resuming
production, people might start doubting our business. If rumours spread, it
affects the decisions of our suppliers."
Prolonged factory deflation is threatening the survival of
smaller Chinese exporters who are locked in relentless price wars for shrinking
business as higher interest rates abroad and rising trade protectionism squeeze
demand.
Producer prices have been falling for 15 straight months,
crushing profit margins to the point where industrial output and jobs are now
at risk and compounding China's economic woes, which include a property crisis
and debt crunch.
About 180 million people work in export-related jobs,
commerce ministry data from 2022 shows.
Raymond Yeung, chief China economist at ANZ, says fixing
deflation should be a higher policy priority than reaching the expected growth
target of around 5% for this year.
"Companies cut product prices, then staff salaries.
Then consumers won't buy - this could be a vicious cycle," he said.
Profits at China's industrial firms fell 2.3% last year,
adding to the 4% drop in COVID-hit 2022. An official survey showed
manufacturing activity contracting for a fourth straight month in January,
while export orders shrank for a 10th month.
For Lin, that has meant the $1.5 million order his client
placed was 25% below a similar one last year. It was 10% below production cost.
Sluggish exports mean policymakers need to pull other levers
to reach their growth target, increasing the urgency of stimulating household
consumption, analysts say.
"The more 'rebalanced' growth is, the faster that
downward pressure on prices and margins will dissipate," said Louis Kuijs,
Asia-Pacific chief economist at S&P Global.
'RAT RACE'
China has been funnelling financial resources into the
manufacturing sector, rather than consumers, exacerbating overcapacity and
deflation concerns, even in booming higher-end sectors, such as electric
vehicles.
An executive at an automotive moulds factory from the
eastern Zhejiang province, who asked not to be named due to the sensitivity of
the matter, expects the firm's output and exports to rise, but earnings to
fall, describing the intensifying competition in the industry as a "rat
race."
As China's central bank unleashes liquidity into the
financial system to spur growth, banks are chasing factories with cheap loan
offers.
But squeezed out by bigger rivals, smaller firms are
unwilling to take on loans to finance new business, in what economists see as a
broken link in China's increasingly inefficient monetary policy.
Investment by private companies, which according to state
officials provide 80% of urban jobs, dropped 0.4% last year, while state
investment rose 6.4%.
"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 halving his workforce to about 20 people last
year, he cannot turn a profit as bigger firms elbow him out of the market.
"But you only need to borrow when you want to
expand," said Miao, adding he mulls closing his business.
THIS TIME IS DIFFERENT
China also went through a deflationary scare in 2015, when
it faced overcapacity in primary industries, such as steel, dominated by
state-owned enterprises. Authorities downsized these companies to reduce supply
and accelerated infrastructure and property construction to boost demand.
"This time it's more of a private sector surplus,"
said Hwabao Trust economist Nie Wen, singling out electronics, chemicals and
machinery makers. These firms employ large numbers of people, a sensitive spot
for China's policymakers.
"It is therefore difficult to shrink supply, so more
effort should be made on the demand side this year," Nie said.
Factory owners say the pressure to cut jobs is intense, even
if some are reluctant to do so.
Yang Bingben, whose company makes industrial-use valves in
the eastern city of Wenzhou, said he had thought of shutting down the business,
but keeps it running as he feels indebted to his workers, most of whom are
close to retirement age.
Still, he doesn't know how long the factory can survive.
"This year will be the best of the next decade,"
Yang said.