Reading the latest Chinese inflation figures is keeping the country’s leaders awake in Beijing. The total absence of customer inflation means that the real estate crisis is not China’s only economic problem. At the same time, falling manufacturing costs imply that Beijing’s planners have created basic distortions in the Chinese economy.
According to the National Bureau of Statistics in Beijing, customer costs rose by only 0. 2% in the 12 months to last June. This result was well below consensus expectations of a 0. 4% increase and even 0. 3% in May. Countries suffering from inflation might welcome those numbers, but in an economy like China’s, which desperately wants to spice up its customers’ spending, they are showing signs of failure. At the same time, costs, what Chinese statisticians call “factory gate costs” and what the rest of the world calls manufacturer costs, were 0. 8% below existing levels in June. a year ago. June is the twenty-first consecutive month of such declines. This persistent downward pressure on costs reflects an 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 drop in manufacturing costs lies an even more worrying story. Last year, Beijing, frustrated by its customers’ moderation in spending, sought to breathe life into its economy by boosting its manufacturing functions in spaces that Beijing planners predicted would dominate the long term: complicated electronics, for example. e. g. batteries, electric cars (EV), solar cells, etc. But, as manufacturers’ falling costs make clear, there is not adequate demand for this increased capacity. This challenge would undoubtedly 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 batteries and solar cells made in China, although the United States is larger and more competitive than Europe, but both have taken action.
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. China’s exports have increased overall, despite those declines, largely due to a cumulative 60% increase in exports to Russia, an increase of about 17% in exports to Latin America, and a 7% increase in exports to Southeast Asia. The increase in sales to Russia obviously reflects the widespread Western embargo against Russia that leaves China as one of its only suppliers. The increase in sales in Latin America and Southeast Asia basically reflects shipments of spare parts to Chinese factories installed there to circumvent U. S. and European price lists and other restrictions. measures to counteract this subterfuge.
Even if Americans and Europeans were more receptive to Chinese products, Beijing’s efforts to increase production capacity to catch up with weak customer demand would have been a mistake. For years, various foreign bodies, such as the International Monetary Fund (IMF), have pleaded Beijing to rely less on exports of manufactured goods and more on a locally driven expansion model. Beijing has followed this recommendation and has claimed this adjustment as its policy. Beijing’s replacement last year goes against this mandatory basic adjustment, and due to the update in the United States and Europe, the attitude was clearly inappropriate. The sharp drop in ex-factory costs is a clear indication of some other challenge for the Chinese economy.
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