In April, China’s producer price index continued to decline, amid sluggish consumer demand and global trade tensions, making the road to economic recovery in China increasingly challenging.
The latest data released by China’s National Bureau of Statistics on Saturday showed that the producer price index remained in negative territory in April. Following a 2.8% drop in March and a 2.7% drop in February, the producer price index in April fell by 2.5% year-on-year.
Although the national consumer price index (CPI) in April saw a slight increase of 0.3% compared to the previous month’s 0.1% rise, it still indicated weak consumer demand. Over the past year, China’s economy has been struggling with flat or declining CPI figures, with consumers cutting back on spending in the aftermath of the COVID-19 pandemic.
Analysts believe that the producer price index may serve as a better indicator of China’s actual economic health. “Chinese manufacturers are producing a lot but not making much profit due to falling prices,” said Chen Long, co-founder and partner of Beijing-based economic and political research firm Plenum, as reported by Bloomberg.
He added, “If you look at nominal GDP growth and corporate profits – they are producing a lot but not making much money because of falling prices.”
In the first quarter, the profits of mainland Chinese listed companies, excluding the financial industry, fell by 5% year-on-year.
Despite intense price competition leading to electric car manufacturers slashing prices, domestic car sales in China still dropped by 5.7% year-on-year in April. This indicates that amidst economic uncertainties, domestic consumers remain cautious in their discretionary spending on commodities.
Meanwhile, the long-depressed real estate market in China shows little sign of bottoming out. Private data from China Real Estate Information Group revealed that in April, sales of new homes by the top 100 developers in China plummeted by 45% year-on-year to $43 billion. This marked a 13% decrease from the previous month and a nearly 20% decline compared to the same period in 2019.
As the property sector, which once contributed about a quarter of China’s economic output at its peak, slows down, the Chinese authorities are looking towards sectors like electric vehicles and batteries, known as the “New Three”, to drive economic growth. However, both the scale of market demand and constraints within the manufacturing industry make it challenging for these initiatives to fill the gap left by the real estate sector.
Adding to the challenges, economists have warned that Beijing’s factory-centric strategy may further fuel downward price pressures and trade frictions.
Western countries have expressed concerns over cheaper Chinese imports flooding their markets, especially as China’s producer price index drops and the depreciating yuan makes Chinese goods even cheaper.
While China’s overall exports in April grew by 1.5%, exports to the EU and the US both declined year-on-year. The affluent markets in Europe and America are crucial for China’s economic development, and this surge in exports is reminiscent of the early 2000s when cheap Chinese imports disrupted industries in the US and other countries.
According to reports from The Wall Street Journal, the Biden administration is preparing to increase tariffs on Chinese clean energy products as early as next week, with tariffs on Chinese electric vehicles set to rise from 25% to around 100%.
Higher trade barriers will make it harder for China to maintain its market share in Europe and America. EU leaders are considering imposing high tariffs on Chinese-made electric vehicles and wind turbines under new anti-subsidy laws, potentially closing off lucrative markets for Chinese companies like BYD.
During his visit to Europe this week, Chinese President Xi Jinping disregarded concerns voiced by Western leaders and insisted that China does not suffer from overcapacity issues.
In response to the news of potential US tariffs on Chinese electric vehicles, China not only refuses to acknowledge the issue but vows to retaliate.
According to data released by the People’s Bank of China on Saturday, the total social financing increment in April decreased by nearly $27.7 billion (200 billion yuan), the first decline in this indicator since comparable data became available in 2017, reflecting a contraction in financing activities.
In April, the M1 money supply (which includes cash in circulation and some corporate current deposits) saw a year-on-year decline of 1.4%, a sign of subdued commercial activities and the first such decline in over two years. Long-term loans for households (representative of mortgage loans) shrank in April, reflecting weakness in the real estate market.
Furthermore, new medium to long-term loans for enterprises decreased compared to the same period last year, highlighting weak investment demand.
In conclusion, the three pillars supporting the Chinese economy – export-driven growth without price increases, the first decline in financing in seven years, and the ongoing weakness in the real estate sector – indicate that the road to economic recovery remains arduous in the short term.