Recently released Chinese CPI and PPI data for consecutive fourth month show a continued decline, indicating deepening deflation in consumption. Additionally, one-third of industrial enterprises in China are operating at a loss, with many relying on subsidies or loans to sustain their existence. Experts suggest that the Chinese Communist Party is striving to maintain these “zombie enterprises” to create an economic stability “illusion” for political stability, but the outcome will only exacerbate deflation.
On June 9, China’s National Bureau of Statistics announced the May Consumer Price Index (CPI) and Producer Price Index (PPI) data, indicating a year-on-year (compared to last May) decrease of 0.1% in CPI and a month-on-month (compared to last April) decrease of 0.2%; PPI decreased by 3.3% year-on-year and 0.4% month-on-month.
Chairman of Taiwan Finance Media, Xie Jinhe, warned on Facebook on June 16 that “China’s deflation is escalating.”
He first mentioned that the rent of the high-end Hang Lung Plaza on Nanjing West Road in Shanghai plummeted from 15 RMB per square meter three years ago to now over a 50% drop to 6.5 RMB, reflecting a scenario of declining property prices and insufficient domestic demand.
Another example is that flying from Beijing to the UK in business class costs only a little over 10,000 NT dollars (about 2,500 RMB), including a night stay and breakfast at the airport, showcasing extreme consumer weakness, impacting even the aviation industry severely.
Xie Jinhe analyzed that there are two main reasons leading to deflation and dragging China’s domestic demand: one being the bursting of the real estate bubble, yet astronomical-sized real estate company debts still remain high, with 31 out of the top 50 real estate companies in China recording significant losses with a total debt of 13.67 trillion RMB; the other being intruding in industries, for instance, BYD Automobile slashing prices by 30%, causing both industry discord and wastage of limited national resources in a chain reaction.
He expressed concern that China’s deflation will continue to worsen, eventually entering a “lost era.”
Eric Zhu, Senior Economist for Bloomberg Asia-Pacific, stated to Bloomberg that the deflation pressure in China shows no sign of abating currently. He also believes that the Communist Party’s policies have not effectively directed resources to benefit consumers.
Aside from real estate enterprises suffering severe losses but not easily subject to liquidation to settle debts, China’s industrial enterprises are currently facing the most severe deficit since 2001 and are often unable to close under the intervention of the Chinese government, relying on government subsidies or bank loans to survive, becoming “zombie enterprises.”
According to Reuters, the data from April this year showed that the number of loss-making industrial enterprises in China had reached 164,467, constituting 32% of the total industrial enterprises, with labor-intensive industries such as furniture and toys being hit the hardest, with many companies struggling and plunging into a state of “slow death.”
Bloomberg’s report indicated that the Chinese government faces a dilemma and serious challenge between allowing the closure of deficit enterprises and avoiding mass unemployment and the potential social unrest it may trigger.
Local governments of debt-laden enterprises have rolled out tax breaks and subsidy policies to allow the businesses to survive, attempting to prevent both an unemployment wave and dwindling tax revenues.
Neil Thomas, China political analyst at Asia Society Policy Institute’s China Center, remarked to Bloomberg that for the top Chinese leadership, employment rates pose a more politically sensitive question than economic growth.
Bloomberg cited estimates from A.T. Kearney, an American consulting company, suggesting that by 2023, the number of “zombie enterprises” surviving on government subsidies or bank loans in China is expected to surge by 27%. This figure is forecasted to continue rising in 2024 and 2025.
Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina told Dajiyuan that the key reasons behind the losses and closures of Chinese enterprises stem from two main factors: continued economic decline domestically, leading to decreased consumer purchasing power and demand; and the trade war between China and the United States along with restrictions from other countries, causing the closure of export channels and leaving many Chinese export enterprises without orders.
Economist Huang Dawei, in an interview with Dajiyuan, emphasized that the main cause of extensive losses among Chinese enterprises is “structural recession,” encompassing collapses in external demand, sluggish domestic consumption, heavy debts, technological bottlenecks, and overcapacity.
Huang Dawei believes that when it comes to handling severely loss-making enterprises, the Communist Party of China does not adhere to commercial or economic rules, focusing instead on considerations of “political stability taking precedence over economic efficiency.” Even if businesses are poorly managed and facing numerous challenges, as long as they don’t close down, an illusion of economic stability is maintained, thereby ensuring political stability.
Furthermore, Huang Dawei stated that by preventing enterprise closures, the CCP can temporarily suppress the “risks in the financial markets and local debt.”
Moreover, concerning the withdrawal of “ineffective production capacity” that the central government considers clear-out-worthy but local governments may strive to prolong the existence of these enterprises for the sake of their GDP, tax revenue, or other local interests.
Xie Tian believes that the CCP’s reluctance to let these enterprises go bankrupt stems from the fear that mass layoffs post-closure would lead to a rise in unemployment.
“With the current already high unemployment rate, further job losses would pose the greatest threat to social stability from restless, unemployed young people,” Xie Tian explains.
He noted that the CCP’s loan, subsidy, and tax reduction policies crafted for the loss-making enterprises have no substantial impact because without export orders, there is little to subsidize. Providing loans to businesses unable to operate is like pouring water into a basket.
He asserts that the CCP is, in fact, unable to revive the economy; with insufficient domestic demand exacerbating business closures and escalating unemployment, leading to additional consumer tightening, further losses, closures, and job losses in related sectors – creating a “genuine vicious circle.”
Huang Dawei suggests that the solution to China’s current enterprise dilemma is straightforward: significantly reduce taxes and fees, withdraw high-margin markets owned by the state to private enterprises, enhance social security for the populace, and improve government management efficiency while reducing political interference.
However, he acknowledges that “this would touch the political bottom line of the CCP,” cautioning that the CCP wouldn’t truly solve the issues but rather come up with minor and short-term effective policies, ultimately resulting in “not only worsening deflation and excess production capacity but also deeper systemic pathologies and escalating vicious cycles.”
Huang Dawei further explains: “‘Zombie enterprises,’ in their desperate quest for survival, take orders regardless of cost, leading to continuous price declines, PPI and CPI dropping continuously, wage suppression, culminating in further consumer weakness, thereby intensifying deflation.”
Reportedly, one of China’s largest online recruitment platforms, Zhaopin, has quietly ceased providing wage data collected for at least a decade, indicating poor conditions in China’s labor market.
In addition, Huang Dawei believes that the government’s continuous support of poorly performing enterprises through subsidies and loans will result in the inability to clear excess production capacity, with enterprises continuing to fold inwardly. “Efficient enterprises cannot expand while inefficient enterprises monopolize the market, leading to a reverse Gresham’s Law effect, further diminishing the investment willingness of private and foreign companies in China. This will exacerbate local and corporate debt crises, leaving the financial market with latent ‘landmines.’”