In China, there is a recurring pattern across various industries such as automotive, food delivery, coffee, and real estate, where companies are eager to enter a sector and then resort to price wars to maintain their survival. Economists are concerned that this phenomenon will worsen deflationary pressures in China.
According to a report by CNBC, Alicia Garcia Herrero, Chief Economist for Asia Pacific at Natixis, highlighted during a webinar on Friday (July 11) that their research on 2,500 listed Chinese companies revealed a situation where trading volumes are increasing, but the value is being undermined by deflationary pressures. Herrero stated that this could be observed when looking at industries and individual companies.
She added that while these companies may seem dominant in the market on the surface, they are actually paying a high price for it, as they struggle to generate the necessary revenue to sustain operations.
This intense and often ineffective competition is referred to as “involutionary” competition. While this trend may lead to lower purchase prices for consumers, it also exacerbates concerns that the economy may spiral into a vicious cycle of deflation, forcing companies to lay off more employees.
Larry Hu, Chief China Economist at Macquarie Group, stated that “involution is both a feature and a flaw of the ‘China model’ from a more fundamental perspective.”
Data released by the National Bureau of Statistics of China on July 9 showed that in the first half of this year, the national consumer price index dropped by 0.1% compared to the same period last year, while the producer price index for industrial goods fell by 2.8%, and the producer purchase price index decreased by 2.9%.
As consumer demand continues to weaken, price wars in various industries in China are intensifying, with companies having to resort to price cuts and promotions to boost sales.
The decrease in commodity prices leads to reduced profits for businesses, prompting them to cut staff wages or even lay off employees. The uncertainty in job prospects further discourages people from spending, leading to further price declines and decreased profits, creating a spiral of deflation.
Jianwei Xu, Senior Economist for Greater China at Natixis, warned during the webinar on Friday that the situation in the second half of this year could be even more severe. He mentioned, “We see that, especially the profits of manufacturing companies are still declining. In the second half of the year, more families may face pressure as finding jobs becomes more difficult.”
In recent years, e-commerce platforms have been relentlessly competing on offering the lowest prices, leading to businesses lamenting that they can barely make a profit from a single order. On July 5, Alibaba’s “Taobao Flash Sale” and “Ele.me” launched a “Flash Sale Day,” offering high-value red packet subsidies and discounts, allowing users to virtually “dine for free.” This move caused a stir online, with many users sharing their delivery orders for “drinking milk tea for 0 yuan” or “eating hamburgers for 4 yuan.”
Rival Meituan quickly adopted a “lightning strike” approach against Alibaba, escalating subsidies to “spend 19 save 19” and launching a “buy for 0 yuan” promotion.
The price war in the coffee market is also fierce, with some coffees being sold at prices even lower than bottled water. American coffee giant Starbucks has faced challenges in the Chinese market as sales continue to decline due to their efforts to maintain coffee prices at around 30 yuan ($4.20) per cup, while competitors like Luckin Coffee offer latte coffee as low as 9.9 yuan.
According to a report by Hong Can Net on June 9, after continuous downward pressure on coffee prices for nearly two years, many independent coffee shops have been caught up in the whirlpool of price competition, making it difficult for them to afford the various costs required for competitive differentiation, leading to a gradual exit from the market.
Hu Weijun, an economist at Macquarie, stated that “Without strong policy stimulus, it’s difficult for the Chinese economy to break free from the spiral of deflation.”
He noted that to achieve growth targets, Beijing has no choice but to introduce large-scale demand stimulus measures. Improving domestic demand will alleviate price competition among material producers and internet giants. However, for manufacturers, absorbing existing production capacity will be a long and painful process.
Xing Ziqiang, Chief Economist for China at Morgan Stanley, and his team mentioned in a report on Thursday that the government’s debt levels are already high, which may limit its willingness and ability to adopt aggressive fiscal expansion measures.
Kyle Bass, Founder and Chief Investment Officer of Hayman Capital Management, recently stated in an interview with EpochTV’s show “American Thought Leader” that “No measures can help China get out of the economic downward spiral they are facing. They are dealing with real estate crises, banking crises, youth unemployment crises, and now they have to worry about current account issues.”
Bass estimated that when combining China’s sovereign debt with local government financing debt, China’s debt-to-GDP ratio is approximately 350%. Considering various economic challenges, managing this is quite difficult.