“We’re seeing a lot of deflationary pressures [building] in the goods market,” said Frederic Neumann, chief Asia economist at HSBC. “And that’s fantastic for Western consumers hoping to buy.”
Neumann said that falling input costs were “radiating out” from reduced activity in China’s property sector, which is grappling with a liquidity crisis and plunging home prices, to related sectors such as home appliances and furniture.
He added that reduced activity in the construction sector had pushed down prices of commodities, particularly steel, creating knock-on effects for manufacturers that consume large amounts of metal.
Chinese manufacturers tend to produce the bulk of their Christmas orders between May and October in order to get goods on shelves in time for the December shopping rush.
The producer price index, which measures the change in the price of goods sold by manufacturers, fell for the 11th consecutive month in August. Raw material input costs measured in the country’s official manufacturing sector purchasing managers’ index contracted for three consecutive months from April to June, before rising again in July and August.
Factory output prices, meanwhile, fell in all but one month between May 2022 and July this year, according to official PMIs.
Concerns over rising costs of living in the US and Europe have dented demand for Chinese goods, leading some factories to cut prices or look to new markets elsewhere in Asia.
“Many factories ... want to survive, so they make the [price] lower and lower ... in order to get more orders from overseas,” said Jenny Tse, marketing manager at Wega Hong Kong, which makes headphones and gaming equipment for foreign brands including Sennheiser at a wholly-owned factory in Shenzhen and in contract plants. Tse added that Wega had cut the price of some goods by more than 20 per cent compared with last year.
Jason Wong, associate director of e-commerce at logistics company Janco, which handles goods exports via Hong Kong, estimated that Chinese producers had lowered prices by about 5-7 per cent this year, partly in order to lure brands under pressure to “de-risk” supply chains by sourcing products from other countries.
“They would rather have a lower margin and sell more rather than keeping their margins and getting less business,” he said.
Anny Cheung, senior director at Hong Kong-based Wah Lung Toys, which manufactures goods for Disney and other brands at three factories in China, said falling labour and raw materials costs had enabled the company to cut prices by about 2 per cent this year.
She added that Western pressure on companies to “de-risk” supply chains to southeast Asia had increased the threat of losing customers.
China’s exports, which provided an economic lifeline during a pandemic-era boom for consumer electronics, have lost momentum this year, contracting 14.5 per cent in July, the most since the start of the pandemic, and falling a further 8.8 per cent in August.
The wider economy has also faltered, eking out quarter-on-quarter growth of 0.8 per cent in the three months to June, as factories underperformed and an anticipated services sector rebound fizzled.
“The global and domestic economy this year has been on a slowdown, so our business ... has also seen a decline,” said Michael Lu, president of gift box producer Brothersbox, which employs 240 people at a factory in Dongguan and supplies brands including Nestlé and Marks and Spencer.
Revenue from orders over the pre-Christmas period was down about 20 per cent compared with last year, he said.
- Additional reporting by Andy Lin and Greg McMillan.
Written by: William Langley and Chan Ho-him
© Financial Times
