Commentary on Political Economy

Wednesday 22 May 2024


China’s Factories Are Humming. Nobody Is Buying

All the indicators point to rising stockpiles of goods as production continues, but consumers are not in the mood to shop.

Consumers aren't in a celebratory mood.
Consumers aren't in a celebratory mood. Source; AFP/Getty Images


Chinese policymakers have spent the last year leaning heavily on industrial production to plug the holes in the economy left by sagging consumer demand and a meltdown in the real estate market. This short-term solution won’t work for much longer, especially as an escalating trade war with the US continues to choke off foreign markets.

Beijing is trying all manner of things to juice demand. A newspaper backed by the People’s Bank of China on Tuesday called for a shift in macroeconomic policy toward boosting demand and away from increasing credit supply. The problem, the Financial News wrote, is that cash is piling up in fixed deposits amid weak consumer confidence.

This lack of motivation is forcing the nation’s manufacturers to cut prices in the hope that buyers will be lured by bargains. A belief that making goods cheaper will spur demand has given factory managers the cover they need to keep churning out products from washing machines and alcohol to cars and electronics. The government is also doing its part, pushing an “old for new” initiative aimed at getting citizens to swap outdated appliances for energy-efficient alternatives.

But these measures cannot yet be considered a success. Output is relatively healthy, which helps boost GDP figures, but any progress in driving the number of electric vehicles and washing machines being sold is being offset by lower prices. Consumers would usually celebrate such price wars, if they were in the mood. They’re not.

And still, the factories keep humming along. One key economic barometer, the Caixin manufacturing purchasing managers’ index — which largely measures activity of small and medium enterprises — last month hit 51.4 points. Anything above 50 indicates expansion, and that figure is the highest since February 2023.

The disconnect between various measures of local supply and demand is exacerbated by weakness in exports. Beijing’s attempts to deal with a faltering global economy, with two major wars raging, isn’t helped by Washington tightening the screws on Chinese imports: the US recently boosted tariffs on EVs from the country and has pressured allies to also cut its rival off.

While there was a kind of equilibrium last year, with sporadic boosts in retail sales helping mop up a steady rate of production, this year is looking a little rocky. In the four months through April, industrial value add — a broad gauge of output — and the more specific category of industrial manufacturing have both outpaced retail sales. What’s more, export delivery, which tells us how much was actually sent overseas, has been weak since July 2022.

The production equation is deceptively simple. If output continues unabated, but both Chinese and foreigners aren’t buying, then the only thing left is for these goods to pile up on shelves.

Official data shows that inventories plateaued over the past year after skyrocketing during the pandemic. But there’s nothing to indicate those elevated levels will come down anytime soon. They may even resume their upward trajectory.

China's Stockpiles Leveled Out

After a massive build up during the pandemic, inventories have stabilized. Recent data indicate a further climb may be ahead.

Source: Bloomberg

Take Li Auto Inc., a maker of luxury mid-sized EVs that reported earnings this week. Deliveries last quarter jumped 53% from a year earlier, and revenue also climbed. But in reality, the average selling price of its cars dropped 11%, and it had to slash shipment targets. Offering cheaper cars isn’t helping: Its delivery forecast for the current period is as much as 20% below analyst estimates. What’s more astounding, though, is that the company’s inventories jumped 77% in just the three months from the end of last year to March 2024.

Li Auto isn’t an outlier. Rival EV maker BYD Co. is sitting on record stockpiles, as is chipmaker Semiconductor Manufacturing International Corp. White-goods maker Haier Smart Home Co.’s inventories are near all-time highs, and even liquor giant Kweichow Moutai Co. has joined the pile-up party.

The sector with the largest inventory build is China’s ailing property market. To handle that problem, local governments have been urged to get into the market and buy unsold apartments funded by 300 billion yuan ($42 billion) of cheap loans from the central bank. The program seems too small to actually work, but if it does then someone — likely local governments — will be left with a mountain of empty apartments.

This might be what Beijing attempts in other parts of the economy that face oversupply. It’s already propping up the nation’s semiconductor sector as part of a broader self-sufficiency campaign. But there’s only so many BYD cars that officials can drive, or Haier washing machines they can install. There may be no limit to the amount of Moutai they’ll need to drink to buy their way out of this economic malaise.

More From Bloomberg Opinion:



A few recent policy initiatives suggest that China is changing its economic priorities. To halt an unprecedented property downturn, Beijing is asking local governments to buy unsold homes with cheap loans from the central bank. Top bureaucrats have been talking about lifting “still-weak domestic demand” lately, a welcome departure for an administration that believes boosting industrial production is the most effective way to lift the nation out of an economic slump.

Once bitten, twice shy. Did President Xi Jinping really change his mind on the roles of real estate and consumption, skeptical investors have been asking. After all, his mantra that “housing is to be lived in, not speculated on” resulted in ruthless crackdowns from all corners of the bureaucracy. Plus, Xi grew up in the 1960s, when “produce first, live later” was a popular slogan. Back then, China was singularly focused on industrial production, developing its nuclear technology, for instance, while ignoring people’s livelihood. Can a person really change their world views shaped during their formative years?

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