China is increasingly redirecting its excess inventories of products, particularly steel, to international markets, leading to what many are calling "deflation exports." As the world's second-largest economy struggles with a sluggish domestic market, this shift has resulted in lower prices for a wide range of goods, causing concern among other nations. Reports indicate that export prices for about 60% of major products have declined, impacting everything from industrial materials to integrated circuits and food. This trend is forcing countries to adopt countermeasures to protect their domestic industries from the influx of cheap Chinese goods.
The latest data from China’s National Bureau of Statistics reveals a purchasing managers' index of 49.1 for August, marking a decrease for the fourth consecutive month. A PMI below 50 indicates unfavorable economic conditions, reflecting the challenges faced by Chinese manufacturers. This downturn highlights the ongoing issues in the manufacturing sector, where companies are struggling to maintain profitability amid rising production costs and falling demand. Despite these domestic struggles, China’s exports remain robust. In July, preliminary trade statistics showed exports totaling $300.5 billion, a 7% increase year-on-year, signaling that while the domestic economy falters, international demand for Chinese products continues to rise.
A significant factor contributing to this situation is the oversupply of steel. Steel prices have dropped by 9% since September 2022, largely due to a real estate recession in China that has dampened construction demand. The construction sector, a key driver of steel consumption, has been hit hard by a slowdown in property development, leading to a glut in steel production. Consequently, crude steel production has outpaced consumption, resulting in a surplus. In the first seven months of the year, China’s steel exports surged by 22% compared to the previous year, reaching 61.23 million metric tons. This increase is reminiscent of export levels seen in 2015, raising alarms in countries that view these low-priced exports as a threat to their local industries.
The repercussions of this flood of low-cost exports are being felt globally. Many countries are taking measures to shield their manufacturing sectors from the adverse effects of Chinese deflationary exports. In July, the European Union raised import duties on Chinese-made electric vehicles, reflecting growing concerns over competition. The U.S. is also considering increasing tariffs on both Chinese steel and EVs, aiming to protect its domestic manufacturers from being undercut by cheaper imports. Additionally, measures are being introduced to prevent Chinese steel from being funneled through Mexico, highlighting the growing concern over market share loss to Chinese products. These protective measures underscore the tensions in international trade and the complexities of navigating a global economy increasingly influenced by China's pricing strategies.
The impact of China's deflationary exports extends beyond steel and vehicles. Consumer goods, including furniture and appliances, have also seen price declines, with home appliance export unit costs dropping by 5%. The consumer price index for July reflected a 1.8% decrease in furniture and appliances, driven by sluggish condo sales and an oversupply of goods that cannot find buyers domestically. Integrated circuits, crucial for technology, have experienced a 10% decrease in export prices, expanding the rate of decline by 4 percentage points from the previous month. Grain prices dropped by 20% in April and have remained down for four consecutive months through July, further illustrating the breadth of the issue. Seafood prices also continue to drop by 10% to 20%, creating significant challenges for producers who rely on stable pricing to maintain profitability.
This pattern of cheap exports is creating a ripple effect, potentially harming corporate earnings and employment levels in other countries. As domestic producers struggle to compete with the influx of low-cost goods, many are forced to reduce production, lay off workers, or even shut down operations entirely. The situation poses a significant risk to economic stability in various regions, as industries reliant on stable pricing and healthy competition face unprecedented challenges. The long-term implications of these developments could include a shift in global manufacturing dynamics, as countries reassess their reliance on Chinese imports and seek to bolster local production capabilities.
China's economic growth, which was reported to be 5% for the first half of the year, is heavily reliant on state-owned enterprises boosting infrastructure investments. However, the government has not implemented significant measures to stimulate domestic consumption. This reliance on deflationary exports may continue as China aims to meet its growth targets for the year. As the global economy reacts to these developments, the long-term implications for both China and its trading partners remain uncertain. The potential for increased trade tensions looms large, as countries grapple with the challenges posed by China's aggressive pricing strategies.
