Consumer demand for non-discretionary items is falling, especially for big ticket items like autos. Inventory across the board is at high levels. But input prices have been rising along with energy costs.
Nonetheless, Chinese factories are pondering a move likely to further dampen demand: hike prices.
Bloomberg reports China as Factory to World Mulls the Unthinkable: Price Hikes.
China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.
To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.
“There’s just no possibility for me to cut prices any more,” says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province. “Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit.”
“China’s return to positive growth in producer prices marks a very significant turning point in deflationary pressures both in China and globally,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “This is only step one, though. We are still waiting for step two: stronger global demand and trade.”
Yet deflation remains a headache for some. At toy drone maker Shantou Chuangxiang Toys Factory in Guangdong, sales manager Sheila Yip says prices are falling on 90 percent of her products because of intense competition from new rivals. The company is only able to increase prices on products with innovative features, she said.
China’s producer price index will weaken again after the first quarter of next year because the “root causes of disinflationary pressures — overall investment and excess capacity — are still very much alive,” Morgan Stanley analysts led by New York-based economist Ted Wieseman wrote in a note Monday.
The weaker yuan is also one of the driving forces behind the PPI turnaround as it pushes up input prices of the raw materials China’s factories need.
“It’s no coincidence that China let the exchange rate weaken last year when deflationary pressures were high,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. “While they may not have slayed the deflationary beast, they have at least wounded it.”
Falling Yuan
Whether or not this is some kind of “turning point” remains to be seen. If price hikes reduce demand, it will put some of these companies out of business.
And from the perspective of the US importer, a rising US dollar may mean prices do not even go up.
Finally, US manufacturers are likely to start screaming about the rising US dollar vs. the Yen and Yuan.
Global trade tensions have not gone away, they just shifted a bit.
Mike “Mish” Shedlock
S. Koreans win.
Time to start building factories in Africa. Or just wait for the Illinois government to implode and build them there.
See “Elasticity”.
chinese suppliers in our biz have been hiking their prices 15% per year for several years now… they have such a backlog of orders/demand that such price hikes are easy & barely impact their ops because they are the only game in town… good luck finding a supplier that ISN’T in china.
until the West & peripheral East build/re-build productive capacity that can compete w/ the chinese, they will simply raise prices as they wish – they’ve practically cornered maufacturing/productive capacity for the entire planet.
elasticity requires choice/alternatives.
Sadly, there is a strong incentive to move manufacturing in the Chinese direction. I remember about a year ago, Corning exec saying only patriotism keeps production of Gorilla glass in the US, the whole phone production chain has moved to China.
Beijing being preemptive by pricing in clintone victory,ie more printing,taxing and borrowing on a even more massive scale,another $ 2.5T in deficit spending by dc next year financed by u guessed it Beijing,and for what?more ebt,more snap more obamacaid handouts
“Hiking Prices Against Weakening Demand: How Will That Work?”
Not well.
Social unrest will occur as factories close. … no US style social safety net. But fret not, the looming global recession will see commodities take a dive …
Really?
Everything is bass ackward in the world….unless you invert everything. Especially economic theories.
Will Chinese prices rise if it means a reduction in volume? When we look at the massive economic fraud of debt that has fueled a significant portion of their economic “miracle” of the last eight years, and the resultant violence associated with each layoff….sometimes well into the tens of thousands, makes me doubt that they will risk ANYTHING that might result in decreased output. For me, they have proven that they will build vacant cities and pay people to build goods that ultimately go into the dump before they will layoff ANYONE that they absolutely do not have to. They have stockpiled record amounts of raw materials while buying up raw material and agricultural assets around the world and in my mind they will ultimately GIVE away goods if it keeps their factories running.
I have no doubt that the Chinese will raise any prices they think they can and NOT sacrifice volume. They have been successful in eliminating their competition all over the planet, which ultimately serves the purpose of market domination specifically TO be able to raise prices. They have won many battles but they have yet to win the war…which IS world domination….by all means possible. If there was EVER a managed economy, surely China would be it, and as such, they are playing the long game….one that suppresses domestic unrest while destroying any competitive forces. Playing to WIN.
Credit and student loans. You know that is how these fresh faced 20 somethings can afford $1000 coats, the latest MacBook pros that are so popular the cheapest is now $1799, going out for Halloween and spending hundreds on costumes. Consumer demand is hardly down
No matter how much factories became more efficient, the bank never let the CPI become more affordable. Shoppers could not afford the products.
Bankers confiscated the entire efficiency gain, leaving none for Joe and Jane average.
Grossly Distorted Prosperity
ECONOMIC DECELERATION – AND HOW TO MEASURE IT
One of the quirks of economics is that, within GDP (gross domestic product), all output is included, irrespective of what it really adds to prosperity. GDP, like Oscar Wilde’s cynic, knows “the price of everything, but the value of nothing”. If government paid 100,000 people to dig holes, and another 100,000 to fill them in, the cost of this activity would be included in GDP.
Is there a better way of measuring prosperity? Well, consider two people who both earn $30,000. Theoretically, their circumstances match. However, if the first has to spend $20,000 on household essentials, leaving him $10,000 to spend as he chooses – whilst the second spends only $5,000 on essentials, leaving him $25,000 for “discretionary” spending – then clearly the second is much more prosperous.
This is analogous to what has been happening to the economy. The long-run trend towards higher energy costs is feeding through into essentials such as food, water, chemicals, minerals, plastics, construction and virtually every other essential purchase. This is undermining the scope for discretionary spending, leaving the economy poorer even if the headline statistics do not seem to bear this out.
On the ground data bears this out. In the United Kingdom, for example, average wages increased by 25% between 2005 and 2015, but the cost of essentials rose by 48%. This process is happening around the world.
For the economy as a whole, it can be illustrated like this:
https://surplusenergyeconomics.wordpress.com/2016/10/30/80-grossly-distorted-prosperity/