Reading the latest Chinese inflation figures keeps the country’s leaders in Beijing awake. The complete absence of customer inflation indicates that the housing crisis is not China’s only economic problem. At the same time, declining manufacturing costs indicate that Beijing’s planners have created basic distortions in the Chinese economy.
According to the National Bureau of Statistics in Beijing, customer costs rose just 0. 2% in the 12 months to June. This result was well below consensus expectations of an increase of 0. 4% and even 0. 3% in May. Countries suffering from inflation might welcome those figures, however, in an economy like China’s, which desperately wants to increase customer spending, they show a failure. At the same time, the costs are what Chinese statisticians call “factory-exit costs” and what the rest of the world calls manufacturer costs. , decreased 0. 8% compared to a year ago in June. June is the 21st consecutive month of such declines. This persistent downward pressure on costs is indicative of oversupply. Chinese factories produce more than the Chinese or foreigners want.
The weakness of Chinese consumers is at the root of these problems. Their reluctance to spend is not a surprise. China’s overall economic slowdown has weighed on wages, and while they have not fallen at all, they have not lived up to the expectations that shaped the economy’s long era of immediate growth. The weight of these advances has been felt more intensely in the middle and lower sections of the economy’s source of income distribution. The legacy of lockdowns and work disruptions, the pandemic and the long generation following Beijing’s imposition of its zero Covid policy have undoubtedly left Chinese workers feeling like they can’t earn as much as they thought. and, as a result, have further eroded their trust. and willingness to earn a living. spend. As if that were not enough, the real estate crisis has caused a drop in the cost of residential real estate. The hundred largest real estate companies in China register a drop in value of around 17% compared to last year. Since most Chinese have most of their wealth stored in their homes, emotions of wealth and willingness to spend have been affected.
Behind the fall in manufacturing costs lies an even more worrying story. Last year, Beijing, frustrated by the moderation of its customers’ spending, sought to spice up its economy by boosting its production functions in spaces that Beijing’s planners predicted would dominate the long term: complicated electronics, for example. e. g. batteries, electric cars (EVs), solar cells, etc. But, as falling manufacturers’ costs make clear, there is no adequate demand for this increased capacity. To be sure, this challenge would have arisen under any circumstances, but it is particularly serious because Western countries have taken steps to restrict Chinese imports. The United States and the European Union have imposed price lists on electric cars and Chinese-made batteries and solar cells, although the United States is larger and more competitive than Europe, but both took action.
Thus, Chinese exports to the EU and the United States have fallen in the last five months, by 10% for the former and 17% for the latter. Chinese exports rose overall despite those declines, largely due to a 60% increase in exports to Russia, a roughly 17% increase in exports to Latin America, and a 7% increase in exports to Latin America. in exports to Southeast Asia. The increase in sales in Russia obviously reflects the widespread Western embargo against Russia, which leaves China as one of its only suppliers. The increase in sales in Latin America and Southeast Asia basically reflects shipments of portions to Chinese factories set up there to circumvent US and European price lists and other restrictions. The United States and the European Union are taking measures to counter this subterfuge.
Even if the Americans and Europeans were more receptive to Chinese goods than they were, Beijing’s efforts to build production capacity to keep up with weak customer demand would have been a mistake. For years, various foreign organizations, such as the International Monetary Fund (IMF), have pleaded with Beijing to rely less on exports of manufactured goods and more on an expansion style driven through the domestic market. Beijing has followed this recommendation and has claimed that adjustment as its policy. Beijing’s replacement last year runs counter to this mandatory basic adjustment and, because of conversion attitudes in the United States and Europe, was especially ill-timed. The sharp drop in ex-factory costs obviously demonstrates another challenge for the Chinese economy.
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