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Bloomberg

World faces longer supply shortage as Chinese factories contract

(Bloomberg) – Eric Li’s factory, which makes glass lampshades for companies like Home Depot Inc., is being pushed to its limits with sales doubling their pre-pandemic level, but like many Chinese manufacturers, it has no plans to expand its business – one of the reluctances that could slow the pace of China’s economic growth this year and prolong a goods shortage felt around the world as demand increases. Soaring commodity prices mean “margins are squeezed,” says Li, owner of Huizhou Baizhan Glass Co. Ltd. in southern China’s Guangdong Province, which generates around $ 30 million in sales. annual income. With the global economic recovery still uneven, “the future is very uncertain, so there is not a lot of pressure to increase capacity,” he adds. The combination of rising input prices, uncertainty over export prospects and a weak recovery in domestic consumer demand meant that the Chinese manufacturing investment from January to April was 0, 4% lower than in the same period in 2019, according to official statistics (comparison with 2019 eliminates the distortion of pandemic data from last year) .Due to the large size of the Chinese manufacturing sector, this poses a risk to both to the country’s growth – which is currently expected to hit 8.5% in 2021, according to a Bloomberg economists tally – and to a global economy struggling with supply shortages and rising prices. have a “considerable” impact on GDP growth this year, said Citigroup Inc. Chinese economist Li-gang Liu. A fall in investment could hurt imports of capital goods and equipment from developed economies like Japan and Germany, “which in turn could slow their economic recovery and also rebound,” he said. -he adds. companies are feeling the pressure. Based in the eastern province of Anhui, the company manufactures capacitors used to manufacture electronic circuits, with sales mainly in the domestic market. Jing Yuan, the founder, claims that orders are increasing up to 30% year over year, but profits are down 50% due to rising costs of materials which are not easily passed on to customers. he has to pay half a month before delivery in order to secure copper and other metals, which they previously paid for months after receiving, he said. “The problem of raw materials must be tackled by the government,” he added. What Bloomberg Economics Says … Chinese industry is absorbing significant cost pressures from rising commodity prices – cushioning the inflationary impact on the rest of the world. Will it last? Our gross margin analysis suggests it could go even longer: the downstream industries – where the cost crisis is most severe – still have a little cushion. David Qu, Chinese economist For the full report, click here. not being able to use their existing facilities, the expansion would therefore be of little use. Chinese electric vehicle maker Nio Inc. suspended production at one of its factories last month, due to a shortage of microchips. Modern Casting Ltd., which manufactures iron and steel products in Guangdong , posted a note to customers this month saying it wouldn’t. able to meet current orders due to high raw material costs. A staff member who answered the phone at the company’s office confirmed the note, but declined to give further details. Growth Transition In addition to rising input costs, Chinese companies are facing a bumpy transition to domestic consumer spending to support their post-pandemic recovery. Exports, China’s strong point last year, may start to slow, as the rollout of vaccines will prompt consumers in rich countries to shift spending toward services. Meanwhile, the growth rate of Chinese consumer spending has yet to fully recover. Investment sentiment among Chinese small and medium-sized enterprises is lower than levels seen even in 2018-9, when uncertainties related to the Trade war between the United States and China has held back expansion plans, according to a regular survey of more than 500 Chinese companies by Standard Chartered Plc. “Demand is still mainly driven by exports, so domestic companies are aware that this is not sustainable,” said Standard Chartered Chinese economist Lan Shen. trending sectors have been pushed to their limits, manufacturers targeting Chinese consumers remain largely behind due to weak domestic demand Retail sales growth was 4.3% in April on average two years, eliminating the base effects of the pandemic, less than half of the pre-pandemic growth rates. Overall capacity utilization of Chinese manufacturers fell to 77.6% in the first quarter from 78.4% in the previous three months, with the auto sector hit hardest by overcapacity after three years of declining prices. sales volumes. have already built their capacity and will now focus on incremental upgrades. “The majority of the investment has been made,” said Jochen Siebert of JSC Automotive Consulting. China ordered state-owned enterprises to expand last year, with their investment growth of 5.3 percent in 2020 from the previous year easily outpacing the 1 percent increase in private investment. But for a sustainable investment recovery, the market, not the state, needs to feel confident. Carsten Holz, an expert in Chinese investment statistics at the Hong Kong University of Science and Technology, says private companies have accounted for 87% of manufacturing investment in 2015, the most recent year of available data. They are more sensitive to input costs. “There is a pandemic and insecurity about future trade given a new US administration, neither is conducive to investments that are based on long-term growth prospects,” Holz said. . challenge for export-oriented manufacturers. Gordon Gao, who exports gardening products from China, said he had to reject 80% of orders this year due to delays at ports. In one case, an order placed before mid-February could not be shipped until three months later when a customer finally secured a container. Beijing tried to improve conditions for private companies by ordering a crackdown on the speculation to reduce commodity prices and facilitate access to banking. Yet the government continues to phase out fiscal and monetary stimulus introduced amid the pandemic last year. He set a relatively unambitious target of “above 6%” growth for this year, and the Communist Party Politburo signaled last month that it would prioritize reforms to control house prices and growth in the country. debt. towards reducing risk to the financial sector, ”said Adam Wolfe, economist at London-based Absolute Strategy Research. “The risks to economic growth appear to be on the downside, especially for capital-intensive and construction-related sectors.” For manufacturers like Li, a longer period of domestic growth and input price controls will be needed before capacity expansion occurs. cards. While his company of 200 workers hired new permanent staff before the pandemic, for now, he prefers to pass the investment risks on to others. “I wouldn’t do that now, I would rather hire temporary workers and outsource the rest. “, Did he declare. More stories like this are available at bloomberg.com