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Bloomberg

World faces longer supply shortage as Chinese factories come under pressure

(Bloomberg) – Eric Li’s factory making glass lampshades for companies like Home Depot Inc. is being pushed to its limits with sales doubling their pre-pandemic level. But like many Chinese manufacturers, it has no plans to expand its operations – a reluctance that could slow the pace of China’s economic growth this year and prolong the shortage of goods felt around the world as demand increases. Soaring commodity prices mean “margins are squeezed,” says Li, owner of Huizhou Baizhan Glass Co. Ltd. in southern China’s Guangdong Province, which has annual sales. of about $ 30 million. With the global economic recovery still uneven, “the future is very uncertain, so there is not much pressure to increase capacity,” he adds. The combination of higher input prices, uncertainties about the export outlook and a weak recovery in consumer demand, manufacturing investment from January to April was 0.4% lower than in the same period in 2019, according to official statistics (comparison with 2019 removes the distortion from last year’s pandemic data) Due to the large size of China’s manufacturing sector, this poses a risk to both the country’s growth – which is expected to currently reaching 8.5% in 2021, according to a tally from Bloomberg economists – and a global economy struggling with supply shortages and rising prices. have a “significant” impact on GDP growth this year, said Li-gang Liu, Chinese economist at Citigroup Inc. The drop in investment could hurt imports of capital goods and equipment from developed economies like Japan and Germany, “which in turn could slow their economic recovery and their rebound as well,” he added. AnHui HERO Electronic Sci & Tec Co. Ltd. businesses are feeling the pressure. Based in the eastern province of Anhui, the company manufactures capacitors used to manufacture electronic circuits, with sales mainly in the domestic market. Jing Yuan, the founder, says orders rose 30% year over year, but profits fell 50% due to rising material costs which are not easily passed on to customers. he has to pay half a month before delivery in order to get copper and other metals, which they previously paid months after receiving, he said. “The issue of raw materials must be addressed by the government,” he added. What Bloomberg Economics Says… Chinese industry is absorbing significant cost pressures from rising commodity prices – cushioning the inflationary impact on the rest of the world. Will it last? Our analysis of gross margins suggests that this could go on for quite some time: Downstream industries – where the cost crisis is most severe – still have a little cushion. David Qu, Chinese economist For the full report, click here. of inputs mean that some manufacturers are unable to use their existing facilities, so the expansion would be of little use. Chinese electric vehicle maker Nio Inc. suspended production at one of its factories last month due to a shortage of microchips. Modern Casting Ltd., which manufactures iron and steel products in Guangdong , posted a note to customers this month saying it wouldn’t. able to meet current orders due to high raw material costs. A staff member who answered the phone at the company’s office confirmed the note, but declined to give further details. Growth Transition In addition to higher input costs, Chinese companies are facing a transition chaotic shift towards domestic consumer spending to support their post-pandemic recovery. Exports, China’s stronghold last year, may start to slow, as vaccine roll-out forces consumers in wealthy countries to shift spending toward services. Meanwhile, the growth rate of Chinese consumer spending has not yet fully recovered. Investment sentiment among Chinese small and medium-sized enterprises is lower than levels seen even in 2018-9, when uncertainties over the US-China trade war held back expansion plans. according to a regular survey by Standard Chartered Plc of more than 500 Chinese companies. “Demand is still mainly driven by exports, so domestic companies are aware that this is not sustainable,” said Lan Shen, Chinese economist at Standard Chartered. oriented sectors have been pushed to their limits, great leeway remains for manufacturers targeting Chinese consumers due to sluggish domestic demand. Retail sales growth was 4.3% in April on a two-year average basis, eliminating the base effects of the pandemic, less than half of pre-pandemic growth rates. Overall capacity utilization of Chinese automakers fell to 77.6% in the first quarter, from 78.4% in the previous three months, with the auto sector hit hardest by overcapacity after three years of declining prices. sales volumes. Even for EVs with rising sales, most companies have already built capacity and will now focus on incremental upgrades. “The majority of the investment has been made,” said Jochen Siebert of JSC Automotive Consulting. China ordered state-owned enterprises to expand last year, growing their investment by 5.3 percent in 2020 from the previous year, easily outpacing the 1 percent increase in private investment. But for a sustainable recovery in investment, the market, and not the state, must feel confident. Carsten Holz, an expert on Chinese investment statistics at the Hong Kong University of Science and Technology, estimates that private companies accounted for 87% of manufacturing investment in 2015, the most recent year of available data. They are more sensitive to input costs. “There is a pandemic and insecurity about future trade given a new US administration, neither of which is conducive to investments based on long-term growth prospects,” Holz said. challenge for export-oriented manufacturers. Gordon Gao, which exports gardening products from China, said he had to reject 80% of orders this year due to port delays. In one case, an order placed before mid-February could not be shipped until three months later, when a customer finally got a container. Beijing has tried to improve conditions for private companies by ordering a crackdown on speculation to lower commodity prices and facilitate access to banks. Yet the government continues to phase out fiscal and monetary stimulus introduced amid the pandemic last year. It has set itself a relatively unambitious target of “above 6 percent” growth for this year, and the Communist Party Politburo announced last month that it would prioritize reforms to control house prices and debt growth. towards reducing financial sector risk, ”said Adam Wolfe, economist at London-based Absolute Strategy Research. “The risks to economic growth appear to be on the downside, especially for capital-intensive and construction-related sectors.” For manufacturers like Li, a longer period of domestic growth and input price controls will be needed before capacity expansion occurs. cards. While his company of 200 workers hired new permanent staff before the pandemic, he prefers for now to transfer the risks of the investment to others. “I wouldn’t do that now, I would rather hire temporary workers and outsource the rest. He said. More stories like this are available at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP

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