Analysis-China’s tumbling prices push some exporters to the brink

By Ellen Zhang and Marius Zaharia

BEIJING/HONG KONG (Reuters) – When Kris Lin, who owns a lighting factory in China, received this year’s first order from a close overseas client, he faced a distressing choice: take it at a loss, or tell workers not to come back after the Lunar New Year.

“It was impossible for me to lose this order,” said Lin, who plans to re-start his factory in the eastern city of Taizhou at around half its capacity after the Feb. 10-17 holiday break.

“I could have lost this client forever, and it would have endangered livelihoods for so many people. If we delay resuming production, people might start doubting our business. If rumours spread, it affects the decisions of our suppliers.”

Prolonged factory deflation is threatening the survival of smaller Chinese exporters who are locked in relentless price wars for shrinking business as higher interest rates abroad and rising trade protectionism squeeze demand.

Producer prices have been falling for 15 straight months, crushing profit margins to the point where industrial output and jobs are now at risk and compounding China’s economic woes, which include a property crisis and debt crunch.

About 180 million people work in export-related jobs, commerce ministry data from 2022 shows.

Raymond Yeung, chief China economist at ANZ, says fixing deflation should be a higher policy priority than reaching the expected growth target of around 5% for this year.

“Companies cut product prices, then staff salaries. Then consumers won’t buy – this could be a vicious cycle,” he said.

Profits at China’s industrial firms fell 2.3% last year, adding to the 4% drop in COVID-hit 2022. An official survey showed manufacturing activity contracting for a fourth straight month in January, while export orders shrank for a 10th month.

For Lin, that has meant the $1.5 million order his client placed was 25% below a similar one last year. It was 10% below production cost.

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Sluggish exports mean policymakers need to pull…