logo
Industrial pruning won't pull China out of deflation as quickly as last time

Industrial pruning won't pull China out of deflation as quickly as last time

Reutersa day ago
BEIJING, July 22 (Reuters) - China's hardened rhetoric against price wars among producers is raising expectations Beijing may be about to kick off industrial capacity cuts in a long-awaited, but challenging, campaign against deflation that carries risks to economic growth.
Communist Party leaders pledged this month to step up regulation of aggressive price-cutting, with state media running its harshest warnings yet against what it describes as a form of industrial competition that damages the economy.
These signals echo Beijing's supply-side reforms a decade ago to reduce the production of steel, cement, glass and coal, which were crucial to ending a period of 54 consecutive months of falling factory gate prices.
This time, however, the fight against deflation will be much more complicated and poses risks to employment and growth, economists say. The trade war with the U.S. meanwhile is intensifying price wars, squeezing factory profits.
Challenges Beijing didn't face last decade include high private ownership, misaligned incentives at local and national level, and limited stimulus options in other economic sectors to absorb the job losses resulting from any capacity cuts.
Beijing sees employment as key to social stability. Exporters and even the state sector are already shedding jobs and cutting wages, while youth unemployment runs at 14.5%.
"This round of supply-side reform is far, far more difficult than the one in 2015," said He-Ling Shi, economics professor at Monash University in Melbourne.
"The likelihood of failure is very high and if it does fail, it would mean that China's overall economic growth rate will decline."
Economists expect that any efforts by Beijing to reduce capacity will be undertaken in small, cautious, steps, with officials - keen to achieve annual economic growth of roughly 5% - keeping a close eye on spillover effects.
An expected end-July meeting of the Politburo, a decision-making body of the Party, might issue more industry guidelines, although the conclave rarely delivers a detailed implementation roadmap.
Analysts expect Beijing to first target the high-end industries that it once billed as the "new three" growth drivers, but which state media now singles out for fighting price wars: autos, batteries and solar panels.
Their expansion accelerated in the 2020s as China redirected resources from the crisis-hit property sector to advanced manufacturing to move the world's No.2 economy up the value-chain.
But China's industrial complex, a third of global manufacturing, looks bloated across the board.
Most sectors have capacity utilisation rates below the 80% "healthy" level, Societe Generale analysts said, blaming weak domestic demand and an investment-driven growth model that favours producers over consumers.
U.S. and EU officials have repeatedly complained that this model is flooding global markets with cheap goods made in China and endangers their domestic industries.
A foreign chemicals company manager surnamed Jiang, who asked for partial anonymity to discuss the industry, said overcapacity in her sector was evident as early as 2023, yet firms continue to expand.
"If money is cheap and abundant, any company thinks it won't go bankrupt and can crush competitors to death," Jiang said.
For all the state support manufacturers receive, most are privately owned, unlike the raw material producers Beijing trimmed last decade, largely through blunt administrative orders.
Reducing capacity now requires a less predictable process of curbing subsidies, cheap land supply, preferential loans or tax rebates, then letting markets pick winners and losers.
But the local officials who would have to implement this have the opposite incentive: developing industry champions that draw supply chain investments and employment to their region.
"Local governments, in their efforts to transform the local economy, encouraged firms to invest in these new sectors," like solar or batteries, a policy adviser said on condition of anonymity due to the topic's sensitivity.
"There's nothing inherently wrong with transformation and upgrading, but the problem is that everyone is targeting the same few sectors," said the adviser, adding that the U.S. trade war has exposed such industries as being "too big."
Yan Se, deputy director of the Institute of Economic Policy at Peking University, said local government resistance would turn "important and necessary" capacity cuts into a long-term, gradual process that won't end deflationary pressure on its own.
Stimulating demand would work better, Yan told a conference last week.
Producer prices dropped for the 33rd month in June.
China faces a painful trade-off between a deeper and shorter stretch of price falls as output cuts trigger job losses and a longer run of overcapacity and deflation that delays the blow to employment, economists say.
Macquarie estimates last decade's reforms chopped tens of millions of jobs. But an ambitious project to redevelop shanty-towns across China, estimated by Morgan Stanley at 10 trillion yuan ($1.4 trillion), offered displaced workers new ones.
Manufacturing is now much less labour intensive. Still, jobs will be lost, and "there's no way" other economic sectors, also facing weak consumer demand, can absorb the shock, said Monash University's Shi.
In another echo from last decade, high-level talk of urban redevelopment re-emerged last week. But any new investment in that area would likely be too small to compensate for lost industrial activity and jobs.
"I don't think we can expect real estate to digest job losses from supply-side reforms anymore," said John Lam, head of Greater China property research at UBS.
"It was used for that in the past and it created overcapacity in our sector," said Lam. Authorities "don't seem to be going in that direction, which I think is correct."
($1 = 7.1772 Chinese yuan renminbi)
Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

Key things to know about Trump's ‘massive' trade deal with Japan
Key things to know about Trump's ‘massive' trade deal with Japan

The Independent

time4 minutes ago

  • The Independent

Key things to know about Trump's ‘massive' trade deal with Japan

Japan agreed a trade deal that would see the US cut import tariffs on automobiles from the East Asian country from 25 per cent to 15 per cent. The deal is a significant boost to the Japanese automobile industry which sends over a quarter of its total exports to the US market. American president Donald Trump described it as the 'largest TRADE DEAL in history' and an 'exciting time for the United States of America'. Here are the key features of the agreement. Japanese investment in US economy The deal commits Japan to investing $550bn in the US economy. Prime minister Shigeru Ishiba confirmed the deal had been struck on Wednesday, just days after his ruling Liberal Democratic Party suffered a major loss in a key upper house election. Despite facing calls to step down in the wake of the loss, Mr Ishiba vowed to move forward with the agreement, insisting it didn't compromise Japan's agricultural interests. 'This agreement does not sacrifice Japanese agriculture,' he said, adding that US rice imports would remain within existing quotas. American access to Japanese market The agreement expands market access for American goods like automobiles, rice and other agricultural products. The full terms are still to be made public, however. Mr Ishiba said he would closely review the agreement before releasing it, noting his chief trade negotiator, Ryosei Akazawa, had made eight trips to Washington since April to negotiate with treasury secretary Scott Bessent and commerce secretary Howard Lutnick. Stock and currency market reactions Japanese markets reacted positively to the deal, with Nikkei rising two per cent in early trading, led by automakers. Toyota's shares jumped 10 per cent while Honda gained nine per cent. However, Japanese bond futures fell sharply, with the 10-year benchmark dropping 0.92 yen to its lowest since March. The yen initially surged to a near two-week high before falling amid reports of Mr Ishiba's impending resignation. The dollar index fell for the third consecutive day. 'There's some dovishness infecting the market at the moment around the US dollar,' Michael McCarthy, market strategist at Moomoo Australia, said. Criticism from American auto industry The agreement drew criticism from American carmakers who argued that the deal gave preferential treatment to Japanese imports. 'Any deal that charges a lower tariff for Japanese imports with virtually no US content than the tariff imposed on North American-built vehicles… is a bad deal for US industry and US auto workers,' said Matt Blunt, president of the American Automotive Policy Council. Tariffs on vehicles made in North America remain at 25 per cent. Exclusion of metals and defence The new agreement does not address the longstanding issue of 50 per cent American tariff on Japanese steel and aluminium. It also excludes provisions related to defence budgets. Mr Trump, however, indicated that Japan could join a proposed US-backed natural gas pipeline project in Alaska. 'They're all set to make that deal now,' he said during brief remarks at the White House. More deals to follow? Mr Trump said that EU trade negotiators would arrive in Washington on Wednesday, signalling momentum for further deals in the coming days. Mr Bessent suggested that the US was open to extending the tariff negotiation deadline of 1 August if progress was made in talks with partners. The US deal with Japan follows months of tension over trade and may help stabilise economic relations between the allies. In 2024, total two-way trade stood at nearly $230bn, with Japan holding a surplus of approximately $70bn. Japan remains the largest foreign investor in the US, with over $2tn in American assets.

India cenbank net bought $1.76 billion in forex market in May, bulletin shows
India cenbank net bought $1.76 billion in forex market in May, bulletin shows

Reuters

time4 minutes ago

  • Reuters

India cenbank net bought $1.76 billion in forex market in May, bulletin shows

MUMBAI, July 23 (Reuters) - The Reserve Bank of India (RBI) bought a net of $1.76 billion in the foreign exchange market in May, data released on Wednesday as part of the central bank's monthly bulletin showed. The RBI said it purchased $9.1 billion and sold $7.3 billion during the month. In April, the central bank had sold a net of $1.66 billion. The Indian rupee had declined by over 1% in May, pressured by persistent uncertainty over U.S. trade policies, an armed conflict between India and Pakistan, and likely dollar-buying interventions by the central bank. The RBI's net outstanding forward sale stood at $65.2 billion as of end-April, compared with a net sale of $72.6 billion at the end of the previous month, the data showed. The central bank intervenes in the spot and forwards market to curb exchange rate volatility. The rupee closed little changed at 86.4075 per U.S. dollar on Wednesday.

Japanese PM Shigeru Ishiba denies reports of resignation amid pressure
Japanese PM Shigeru Ishiba denies reports of resignation amid pressure

BreakingNews.ie

time5 minutes ago

  • BreakingNews.ie

Japanese PM Shigeru Ishiba denies reports of resignation amid pressure

Japanese Prime Minister Shigeru Ishiba has denied reports he plans to announce his resignation over a historic defeat of his ruling party in a weekend election, saying instead he wanted to make sure a new tariff agreement with the United States is appropriately implemented. Mr Ishiba has been under growing pressure to step down as his ruling Liberal Democratic Party and its junior coalition partner, Komeito, lost their majority in the 248-member upper house, the smaller and less powerful of Japan's two-chamber parliament on Sunday, shaking his grip on power and Japan's political stability. Advertisement The loss means Mr Ishiba's ruling coalition, which also lost a majority in the more powerful lower house in October, now lacks a majority in both houses of parliament, making it even more difficult for his government to achieve any policy goals and worsening Japan's political instability. Mr Ishiba had announced his intention to stay on to tackle pressing challenges, including tariff talks with the US, without creating a political vacuum, sparking calls from inside and outside his own party for a quick resignation to respond to the election results. With the tariff deal with the US paving the way for his possible departure, Japanese media said he is expected to soon announce plans to step down in August. Mr Ishiba spoke to the media after President Donald Trump announced a trade framework with Japan (Kyodo News via AP) The Yomiuri newspaper, in an extra edition on Wednesday, said Mr Ishiba had decided to announce his resignation by the end of July after receiving a detailed report from his chief trade negotiator, Ryosei Akazawa, paving the way for a party leadership vote to choose his successor. Advertisement Mr Ishiba denied the report and said he wants to focus on the US trade deal, which covers more than 4,000 goods affecting many Japanese producers and industries. The Prime Minister, who met party heavyweights and former prime ministers Taro Aso, Fumio Kishida and Yoshihide Suga on Wednesday at party headquarters, told reporters afterwards that they did not discuss his resignation or a new party leadership contest. They only discussed the election results, shared the sense of crisis and confirmed the need to avoid party discord, he said. Mr Ishiba welcomed the trade agreement on Wednesday, which places a 15% tax on Japanese cars and other goods imported into the US from Japan, down from the initial 25%. He said it was a product of tough negotiations to protect the national interest and that it would help benefit both sides as they work together to create more jobs and investment. Advertisement But Mr Ishiba declined to comment on his possible move and only told reporters that he has to closely examine the trade deal first. In Sunday's election, voters frustrated with price increases exceeding the pace of wage hikes, especially younger people who have long felt ignored by the ruling government's focus on senior voters, rapidly turned to emerging conservative and right-wing populist parties, like the Democratic Party for the People and Sanseito. None of the opposition parties have shown interest in forming a full-fledged alliance with the governing coalition but they have said they are open to cooperating on policy.

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into a world of global content with local flavor? Download Daily8 app today from your preferred app store and start exploring.
app-storeplay-store