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CNBC
11-07-2025
- Business
- CNBC
China's deflationary slide is worsening as companies spiral into price wars
BEIJING — From coffee to cars to real estate, there's a recurring pattern in China: companies rush into an industry, then resort to discounts to stay afloat. That has economists worried. Natixis' study of 2,500 listed Chinese companies reinforce how volume is growing while value is being hurt by deflationary pressure, Alicia Garcia Herrero, the firm's chief economist for Asia-Pacific, said on a webinar Friday. "You can see it sector by sector, company by company." "On the surface you're dominating, but deep inside you're paying a high price to dominate," she said. "You don't get the revenue needed to continue." A reflection of the breadth of impact, consumer prices fell by 0.1% in the first six months of the year from a year ago, while factory-gate producer prices dropped by 2.8%, official data shows. In that time, only seven of 48 producer price sub-categories rose, versus about half of the 37 consumer price components. That fierce and often unproductive competition is described as "involution" in China. The government has picked up on the term in recent policy documents, calling for efforts to tackle the trend. While the trend has made tech and products more affordable for the mass market, it has also underscored worries of a vicious cycle that forces businesses to cut more jobs. "With involution, the Chinese economy feels much colder than the headline growth suggests," Larry Hu, chief China economist at Macquarie, said in a report Thursday. He pointed out that mainland China-listed "A share" companies expanded their workforces by just 1% in 2024, the slowest on record. "From a more fundamental perspective, involution is both a feature and a bug of the 'China model,'" he said. "Massive investment leads to price wars and poor returns for shareholders. But for policymakers, intense competition could help achieve industrial upgrading and self-reliance." China's push into electric cars has been the most apparent example, with industry giant BYD offering some discounts of nearly 30% or more this year and smartphone company Xiaomi pricing its latest SUV below that of Tesla's Model Y. U.S. coffee giant Starbucks has struggled in China with falling sales as it maintains prices of around 30 yuan per cup ($4.20) — while a host of rivals from Luckin Coffee to boutiques sell lattes for as low as 9.9 yuan. Even in commercial real estate, property owners who have tried to raise prices in Beijing ended up facing higher vacancies, Rayman Zhang, managing director for North China, at property manager JLL, told reporters Thursday. He noted that there's still insufficient demand — with little expectation for a turnaround in the near future. China is expected Tuesday to report second-quarter gross domestic product growth of 5.2% from a year ago, according to a Reuters poll. That would be slower than the 5.4% increase in the first quarter, but in line with the national target of around 5% growth for the year. But the second half of the year will likely reveal a far more stressful picture, warned Jianwei Xu, senior economist for Greater China at Natixis. He was also speaking at Friday's webinar. "We are seeing the profits especially for manufacturing companies, are still decreasing," he said. "There could be more households under stress in [the second half of the year] because it will be more difficult to find a job." This isn't the first time China has dealt with overcapacity, analysts pointed out, referencing excessive capacity in the state-dominated commodities sector about a decade ago. But this time, fewer state-owned companies are involved, making it more difficult for policymakers to act. "The dominance of private firms in industries with overcapacity tends to complicate the coordination of mergers, even with government guidance," Robin Xing, chief China economist at Morgan Stanley, and a team said in a report Thursday. "The economy is also starting from a weaker point, which necessitates more demand-side stimulus to counter the impact of supply reduction," the report said. "However, the government's debt level is already high (~100% of GDP), which may constrain its willingness and ability to undertake aggressive fiscal expansion." China's top leaders are expected to maintain the current fiscal stimulus at a high-level Politburo meeting late this month. Beijing in March raised the country's fiscal deficit for the year to 4% — up from 3% last year. Notably, Chinese President Xi Jinping on July 1 led a high-level financial and economic commission meeting that called for more governance of "low price, disorderly competition," according to a CNBC translation of Chinese state media. The ruling Chinese Communist Party's official Qiushi journal on July 1 even outlined several measures that promote standardized government behavior to address involution-style competition, warning of serious economic damage. The article cited high-level government meetings from the last several months. "To achieve the growth target, Beijing will have no choice but to launch a major demand stimulus," Hu said. "Afterwards, the improved domestic demand would ease the price competition among material producers and internet giants. But for manufacturers, it will be a long and painful process to absorb the existing capacity." Exacerbating problems with resolving China's domestic overcapacity is the trade war with the U.S., Goldman Sachs analysts pointed out in a July 1 report. The U.S. and European Union became more critical of China's persistent overcapacity issues last year. Both have raised tariffs on Chinese electric cars in particular in an attempt to protect domestic automakers. The U.S. in April also targeted China with higher duties across the board. The escalation of tariffs has made Chinese manufacturers more determined to build factories overseas, "potentially generating redundant supply in the coming years," the Goldman report said. The analysts estimated a 0.5% to 14% increase in capacity by the end of 2028, up from the 0.4% to 10% expansion projected a year ago. And among seven sectors — air conditioners, solar modules, lithium batteries, electric vehicles, power semiconductors, steel and construction machinery — five have more capacity than the entire global demand, the Goldman analysts said. Only ACs, and EVs — just barely — enjoy some market potential.


CNBC
09-07-2025
- Business
- CNBC
China's producer prices fall 3.6% in June, biggest drop in nearly two years as deflation deepens
China's producer prices plunged 3.6% in June from a year earlier, marking its largest decline in nearly two years, as a deepening price war rippled through the economy that's already grappling with weakening consumer demand. The consumer price index edged 0.1% higher in June from a year ago, according to data from the National Bureau of Statistics Wednesday, showing early signs of recovery after four consecutive months of declines. Economists had forecast a flat reading compared to the same period a year earlier, according to a Reuters poll. The deflation in producer prices came worse than the expected 3.2% drop in a Reuters poll, marking the biggest fall since July 2023, according to LSEG data. The PPI has been mired in a multi-year deflationary streak since September 2022. "Without a strong policy stimulus, it's hard to escape the ongoing deflationary spiral," said Larry Hu, chief China economist at Macquarie, adding that the momentum in China's exports in recent months has partly pared back Beijing's desire to stimulate consumption in any meaningful way. "Policymakers will keep waiting until exports fall sharply," Hu added. Last week, Chinese policymakers, in a top economic policy meeting chaired by President Xi Jinping, criticized the excessive price competition by Chinese companies to entice consumers, as the U.S. tariff onslaught has threatened the viability of selling to the world's largest consumer market. Beijing pledged to tighten regulations on such aggressive price-cutting that has been unable to influence consumer behavior while biting into businesses' profitability. "Businesses should be guided to improve product quality and support the orderly phasing out of outdated production capacity," a Chinese state-backed newspaper said, citing the meeting. Profits at industrial firms plunged 9.1% in May from a year earlier, marking the steepest fall since October last year.


Zawya
29-04-2025
- Business
- Zawya
China holds off on new stimulus, shows composure in US trade war
BEIJING - China has advanced this year's stimulus plans but is holding off on fresh measures as it tries to maintain composure, betting on Washington blinking first in a protracted trade war. The Communist Party's elite decision-making body, the Politburo, pledged on Friday to support firms and workers most affected by triple-digit U.S. tariffs on Chinese goods, but stopped short of announcing additional deficit spending. The decision to withhold additional stimulus disappointed investors, leading to a 3% slump in Chinese real estate stocks on Monday, despite official efforts to assuage market concerns over a sharp downturn in growth. Beijing is already in a higher stimulus gear, which it can maintain over the coming months to mitigate the pain of losing, at least temporarily, its biggest customer, analysts and policy advisers said. The lack of new stimulus does not point to a capitulation on its high growth ambitions this year - matching last year's growth of around 5% - but a strategy to remain flexible amid the tariff war with President Donald Trump's administration. "It's simply too early for Beijing to go all-in," said Larry Hu, chief China economist at Macquarie. "It's much easier for Trump to walk back his tariff threat than it is for Beijing to walk back its stimulus announcement. Moreover, policymakers could announce new stimulus at any time." China has already brought forward the implementation of its 2025 stimulus plans and that will continue, Hu said. In January-March, government spending rose 4.2% from a year earlier, while revenue fell 1.1%, resulting in a fiscal deficit of 1.26 trillion yuan ($173 billion), the highest first-quarter reading on record, government data showed. Furthermore, local governments issued nearly 1 trillion yuan in new special bonds over that period, up nearly 60% from a year earlier. The People's Bank of China has also escalated lending to state-backed investors to support the stock market. Growth of China's total social financing, a broad measure of credit and liquidity, hit a 10-month high of 8.4% in March, central bank data showed. New loans to non-bank institutions hit 284.4 billion yuan in February - the second-highest reading since a peak of 886 billion yuan in July 2015, China's last major stock market crisis. Non-bank loans fell in March but analysts expect April to be strong. Policy advisers say more can be done if needed. "We have policy reserves in place - various contingency plans have already been prepared," said a policy adviser who spoke on condition of anonymity due to the topic's sensitivity. "The timing of new policies will depend on how big the tariff impact turns out to be." A second adviser said room for policy easing remained "ample," but he added that new measures "cannot be rushed." "We cannot afford to lose that flexibility," he said. "We still need to assess how the situation evolves before deciding how to proceed." The Politburo statement also flagged further interest rate cuts and liquidity injections, such as by reducing the amount of cash banks are required to hold as reserves, but a source close to the PBOC said the central bank was in no rush to trim as the tariffs' ultimate impact was still unclear. "The external environment has been changing so fast," the source said, but added: "If the data starts to deteriorate in coming months, the central bank will certainly roll out monetary stimulus." GROWTH RISKS The Trump administration struck a more conciliatory tone last week, saying the tariffs were unsustainable and signaling openness to de-escalating the trade war. But Beijing appears to be hunkering down, denying Trump statements that negotiations are taking place, and calling on Washington to remove the tariffs. Eurasia Group's China director Dan Wang said that not giving ground to Trump could appease the domestic audience, but internally, Chinese officials are "fully aware of the risks" to growth. She estimates China needs 2 trillion yuan in new stimulus to keep this year's economic growth from falling below 4%. Morgan Stanley analysts also expect 1 trillion yuan to 1.5 trillion yuan in new measures in the second half of the year, "which would not fully offset the tariff shocks." Ting Lu, chief China economist at Nomura, says announcing a new raft of stimulus now would be akin to Beijing "blinking first in the game of chicken by showing nervousness and chaos." Instead, China wants to "present an image that it is calm and well-prepared" for the trade war, he said. But the risk is that of a bigger than expected shock to the economy in the near term, which would take longer - and might require greater policy efforts down the line - to recover from. "Their approach is to watch and wait for the U.S. to collapse slowly," said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, but adding "this approach is very costly." ($1 = 7.2841 Chinese yuan)


New Straits Times
29-04-2025
- Business
- New Straits Times
China holds off on new stimulus, shows composure in US trade war
BEIJING: China has advanced this year's stimulus plans but is holding off on fresh measures as it tries to maintain composure, betting on Washington blinking first in a protracted trade war. The Communist Party's elite decision-making body, the Politburo, pledged on Friday to support firms and workers most affected by triple-digit US tariffs on Chinese goods, but stopped short of announcing additional deficit spending. The decision to withhold additional stimulus disappointed investors, leading to a 3 per cent slump in Chinese real estate stocks on Monday, despite official efforts to assuage market concerns over a sharp downturn in growth. Beijing is already in a higher stimulus gear, which it can maintain over the coming months to mitigate the pain of losing, at least temporarily, its biggest customer, analysts and policy advisers said. The lack of new stimulus does not point to a capitulation on its high growth ambitions this year - matching last year's growth of around 5 per cent - but a strategy to remain flexible amid the tariff war with President Donald Trump's administration. "It's simply too early for Beijing to go all-in," said Larry Hu, chief China economist at Macquarie. "It's much easier for Trump to walk back his tariff threat than it is for Beijing to walk back its stimulus announcement. Moreover, policymakers could announce new stimulus at any time." China has already brought forward the implementation of its 2025 stimulus plans and that will continue, Hu said. In January-March, government spending rose 4.2 per cent from a year earlier, while revenue fell 1.1 per cent, resulting in a fiscal deficit of 1.26 trillion yuan (US$173 billion), the highest first-quarter reading on record, government data showed. Furthermore, local governments issued nearly 1 trillion yuan in new special bonds over that period, up nearly 60 per cent from a year earlier. The People's Bank of China has also escalated lending to state-backed investors to support the stock market. Growth of China's total social financing, a broad measure of credit and liquidity, hit a 10-month high of 8.4 per cent in March, central bank data showed. New loans to non-bank institutions hit 284.4 billion yuan in February - the second-highest reading since a peak of 886 billion yuan in July 2015, China's last major stock market crisis. Non-bank loans fell in March but analysts expect April to be strong. Policy advisers say more can be done if needed. "We have policy reserves in place - various contingency plans have already been prepared," said a policy adviser who spoke on condition of anonymity due to the topic's sensitivity. "The timing of new policies will depend on how big the tariff impact turns out to be." A second adviser said room for policy easing remained "ample," but he added that new measures "cannot be rushed." "We cannot afford to lose that flexibility," he said. "We still need to assess how the situation evolves before deciding how to proceed." The Politburo statement also flagged further interest rate cuts and liquidity injections, such as by reducing the amount of cash banks are required to hold as reserves, but a source close to the PBOC said the central bank was in no rush to trim as the tariffs' ultimate impact was still unclear. "The external environment has been changing so fast," the source said, but added: "If the data starts to deteriorate in coming months, the central bank will certainly roll out monetary stimulus." GROWTH RISKS The Trump administration struck a more conciliatory tone last week, saying the tariffs were unsustainable and signaling openness to de-escalating the trade war. But Beijing appears to be hunkering down, denying Trump statements that negotiations are taking place, and calling on Washington to remove the tariffs. Eurasia Group's China director Dan Wang said that not giving ground to Trump could appease the domestic audience, but internally, Chinese officials are "fully aware of the risks" to growth. She estimates China needs 2 trillion yuan in new stimulus to keep this year's economic growth from falling below 4 per cent. Morgan Stanley analysts also expect 1 trillion yuan to 1.5 trillion yuan in new measures in the second half of the year, "which would not fully offset the tariff shocks." Ting Lu, chief China economist at Nomura, says announcing a new raft of stimulus now would be akin to Beijing "blinking first in the game of chicken by showing nervousness and chaos." Instead, China wants to "present an image that it is calm and well-prepared" for the trade war, he said. But the risk is that of a bigger than expected shock to the economy in the near term, which would take longer - and might require greater policy efforts down the line - to recover from.


Reuters
28-04-2025
- Business
- Reuters
China holds off on new stimulus, shows composure in US trade war
Summary Politburo does not flag any additional deficit spending China wants to project confidence in its economy Officials ready to deploy more stimulus later, advisers say Size of extra stimulus depends on how trade war goes BEIJING, April 28 (Reuters) - China has advanced this year's stimulus plans but is holding off on fresh measures as it tries to maintain composure, betting on Washington blinking first in a protracted trade war. The Communist Party's elite decision-making body, the Politburo, pledged on Friday to support firms and workers most affected by triple-digit U.S. tariffs on Chinese goods, but stopped short of announcing additional deficit spending. The decision to withhold additional stimulus disappointed investors, leading to a 3% slump in Chinese real estate stocks (.CSI000952), opens new tab on Monday, despite official efforts to assuage market concerns over a sharp downturn in growth. Beijing is already in a higher stimulus gear, which it can maintain over the coming months to mitigate the pain of losing, at least temporarily, its biggest customer, analysts and policy advisers said. The lack of new stimulus does not point to a capitulation on its high growth ambitions this year - matching last year's growth of around 5% - but a strategy to remain flexible amid the tariff war with President Donald Trump's administration. "It's simply too early for Beijing to go all-in," said Larry Hu, chief China economist at Macquarie. "It's much easier for Trump to walk back his tariff threat than it is for Beijing to walk back its stimulus announcement. Moreover, policymakers could announce new stimulus at any time." China has already brought forward the implementation of its 2025 stimulus plans and that will continue, Hu said. In January-March, government spending rose 4.2% from a year earlier, while revenue fell 1.1%, resulting in a fiscal deficit of 1.26 trillion yuan ($173 billion), the highest first-quarter reading on record, government data showed. Furthermore, local governments issued nearly 1 trillion yuan in new special bonds over that period, up nearly 60% from a year earlier. The People's Bank of China has also escalated lending to state-backed investors to support the stock market. Growth of China's total social financing, a broad measure of credit and liquidity, hit a 10-month high of 8.4% in March, central bank data showed. New loans to non-bank institutions hit 284.4 billion yuan in February - the second-highest reading since a peak of 886 billion yuan in July 2015, China's last major stock market crisis. Non-bank loans fell in March but analysts expect April to be strong. Policy advisers say more can be done if needed. "We have policy reserves in place - various contingency plans have already been prepared," said a policy adviser who spoke on condition of anonymity due to the topic's sensitivity. "The timing of new policies will depend on how big the tariff impact turns out to be." A second adviser said room for policy easing remained "ample," but he added that new measures "cannot be rushed." "We cannot afford to lose that flexibility," he said. "We still need to assess how the situation evolves before deciding how to proceed." The Politburo statement also flagged further interest rate cuts and liquidity injections, such as by reducing the amount of cash banks are required to hold as reserves, but a source close to the PBOC said the central bank was in no rush to trim as the tariffs' ultimate impact was still unclear. "The external environment has been changing so fast," the source said, but added: "If the data starts to deteriorate in coming months, the central bank will certainly roll out monetary stimulus." GROWTH RISKS The Trump administration struck a more conciliatory tone last week, saying the tariffs were unsustainable and signaling openness to de-escalating the trade war. But Beijing appears to be hunkering down, denying Trump statements that negotiations are taking place, and calling on Washington to remove the tariffs. Eurasia Group's China director Dan Wang said that not giving ground to Trump could appease the domestic audience, but internally, Chinese officials are "fully aware of the risks" to growth. She estimates China needs 2 trillion yuan in new stimulus to keep this year's economic growth from falling below 4%. Morgan Stanley analysts also expect 1 trillion yuan to 1.5 trillion yuan in new measures in the second half of the year, "which would not fully offset the tariff shocks." Ting Lu, chief China economist at Nomura, says announcing a new raft of stimulus now would be akin to Beijing "blinking first in the game of chicken by showing nervousness and chaos." Instead, China wants to "present an image that it is calm and well-prepared" for the trade war, he said. But the risk is that of a bigger than expected shock to the economy in the near term, which would take longer - and might require greater policy efforts down the line - to recover from. "Their approach is to watch and wait for the U.S. to collapse slowly," said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, but adding "this approach is very costly." ($1 = 7.2841 Chinese yuan)