In 2023, Chinese policymakers relied on industrial production to offset the decline in consumer demand and the real estate crisis. However, this short-term solution is losing its effectiveness, especially as the escalating trade war with the US continues to choke exports of the world's second largest economy.
Beijing is trying everything to stimulate demand. On May 28, a newspaper backed by the Central Bank of China (PBoC) called for changes in macroeconomic policy to promote demand and avoid increasing credit supply. However, Financial News points out that the problem with the Chinese economy is that cash is accumulating in high-interest fixed deposits, amid declining consumer confidence.
The weak demand backdrop forces domestic manufacturers to cut prices and hope buyers will be lured by bargains. Believing that price cuts will boost demand, companies continue to produce everything from washing machines and alcohol to cars and electronics. The Chinese government is also trying to revive demand with the "exchange old for new" initiative, encouraging people to exchange outdated devices for energy-efficient ones.
But these measures cannot be considered successful. Output is relatively healthy, helping boost GDP figures, but any progress in boosting sales of electric vehicles and washing machines is offset by the impact of lower prices.
Despite low demand, factories continue to produce bustlingly. The Caixin manufacturing purchasing management index - which tracks the activities of small and medium-sized enterprises - last month reached 51.4 points, which is in a state of expansion, the highest number since February 2023.
The supply-demand imbalance becomes even more serious in the context of weak exports. Additionally, the US has increased tariffs on electric vehicles from China and is pressuring allies to follow suit.
This year, China's economy entered a more difficult situation than in 2023. In the first four months of the year, industrial output continued to grow far beyond retail sales, while export deliveries weakened. from July 2022. As a result, goods pile up on shelves and inventory increases.
Output does not decrease, while demand is not high. As a result, goods will pile up in the warehouse.
Official data shows inventories stabilized somewhat over the past year after soaring during the pandemic. However, there are no signs that inventories will drop any time soon, and may even continue to rise.
Such as the case of Li Auto Inc., a mid-sized electric vehicle manufacturer that just released its financial report this week. In the first quarter of the year, the number of vehicles delivered increased by 53% compared to the previous year, and revenue also increased. However, the average selling price of the company's car models has decreased by 11%.
Providing cheaper cars also does not increase sales more strongly. Li Auto forecasts deliveries in the current period to be up to 20% lower than analysts' estimates. What is amazing is that the company's inventory increased by 77% in just the first 3 months of the year.
Not only Li Auto, electric vehicle tycoons such as BYD and chip company Semiconductor Manufacturing International Corp (SMIC) also have record inventories. The inventory of electronics manufacturer Haier Smart Home Co. near all-time highs, and liquor giant Kweichow Moutai Co. There are also piles of goods waiting to be sold.
The field with the largest inventory is still real estate. To revive this market demand, the Chinese Government has directed local authorities to buy "sold" apartments with a preferential loan package of 300 billion yuan (42 billion USD ) from the PBoC. The program is too small to be truly effective, and local authorities face the question of what to do with empty apartments.
Beijing is trying to deal with oversupply in other areas of the economy, but reality shows that these problems are not easy to solve.
*The article represents the opinion of Tim Culpan on Bloomberg Opinion
(fili.vn)
Comments