World faces longer supply shortage as Chinese factories contract
Eric Li’s factory that makes glass lampshades for companies like Home Depot Inc. is being pushed to its limits, with sales doubling to pre-pandemic levels.
But like many Chinese manufacturers, it has no plans to expand its business – a reluctance that could slow the pace of China’s economic growth this year and prolong a felt shortage of products around the world as demand grows. straightens.
Soaring commodity prices mean “margins are squeezed,” says Li, owner of Huizhou Baizhan Glass Co. in southern China’s Guangdong Province, which has annual sales of about $ 30 million. 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 caused Chinese manufacturing investment from January to April to be 0.4% lower than the same period in 2019, according to official statistics (compared to 2019, the distortion of data on last year’s pandemic).
Due to the large size of China’s manufacturing sector, this poses a risk both to the country’s growth – which is currently expected to reach 8.5% in 2021, according to a tally of estimates by Bloomberg economists – and to a global economy. struggling with the offer. shortages and rising prices.
Lower-than-expected investment could have a “considerable” impact on GDP growth this year, said Chinese economist from Citigroup Inc., 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.
AnHui HERO Electronic Sci & Tec Co. Ltd. is one of those companies that feels 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.
The company is under “enormous cash pressure” as it has to pay half a month before delivery in order to secure copper and other metals, which it previously paid for months after receiving, did -he declares. “The issue of commodities must be dealt with by the government,” he added.
Input shortages mean that some manufacturers are unable to use their existing facilities, so the expansion would be of little use. Chinese electric carmaker Nio Inc. suspended production at one of its factories last month due to a shortage of microchips.
Modern Casting Ltd., which manufactures steel products in Guangdong, released a note to customers this month saying it would not be able to fulfill its current orders due to the high cost of raw materials. A staff member who answered the phone at the company’s office confirmed the note, but declined to give further details.
In addition to higher input costs, Chinese companies face 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.
Chinese small and medium-sized enterprises’ investment sentiment is lower than levels seen even in 2018-19, when uncertainties over the US-China trade war held back expansion plans, a regular survey shows. conducted among 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.
While some export-oriented sectors have been pushed to their limits, there is still significant leeway for manufacturers targeting Chinese consumers due to subdued domestic demand.
Retail sales growth was 4.3% in April on a two-year average basis, 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.
Even for electric vehicles with increasing sales, most companies have already built 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 recovery in investment, the market, not the state, must feel confident.
Carsten Holz, an expert on Chinese investment statistics at the Hong Kong University of Science and Technology, estimates that private companies 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 of which is conducive to investments that rely on long-term growth prospects,” Holz said.
Bottlenecks in transportation are also a 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 has tried to improve conditions for private companies by ordering a crackdown on speculation to curb commodity prices and facilitating access to bank loans.
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.
“The policy direction has definitely moved away from supporting growth and back to reducing financial sector risk,” 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 is considered. While his company of 200 workers hired new permanent staff before the pandemic, he prefers for now to pass the investment risks on to others.
“I wouldn’t do that now, I would rather hire temporary workers and outsource the rest,” he said.
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