This August witnessed the lowest PPI (Producer Price Index) data in 34 months which once again verified the judgment that “the time for the Chinese economy to reach the bottom may be delayed”. The “sandwich trap” is exactly the current true portrayal of the difficulties that Chinese enterprises are encountering.
The current situation is that enterprises are using lower sales revenue to offset higher costs of inventory, dragging the enterprises into the sandwich trap. Both ends are squeezed and therefore the profit margins are significantly reduced. Due to the pessimistic attitude towards subsequent demands, most of the enterprises are cautious when procuring raw materials, resulting in thinner terminal demands. Retail inventory digestion has limited impact on the suppliers’ inventory therefore the enterprises are not encouraged to further supplement stock. What can be expected is that even if the enterprises restock, it will probably be an interim action. The virtuous cycle of restocking will be difficult to enter and the downturn of PPI can be hardly reversed in the short term.
The synchronization features of the price cycle and profit cycle are further demonstrated. With the continued negative growth in PPI, industrial enterprises also experienced a sharp decline in profits over the whole supply chain and within the whole industry. Enterprises are deeply trapped in the overcapacity predicament of “shrinking demand type”. At the end of last year,PekingUniversityconducted a survey on 3,000 small and medium-sized enterprises in eastern coastal areas. The survey report shows that the average profits of the investigated enterprises have shrunk by 30-40% since the previous year. With the rising costs of raw materials and labor, many enterprises cannot rely on better brand-building and applications of more advanced technology to maintain profits. What is more, overseas demands are shrinking and orders are decreasing greatly and most of the enterprises can currently only reach 71% of their average capacity.
The trend further spread to large and medium-sized industrial enterprises this year. Data shows that, from January to July,China’s above-scale industrial enterprises realized profits of 2.6785 trillion yuan, a year-on-year decline of 2.7%. Individually in July, the profit number is 366.8 billion yuan, a year-on-year decline of 5.4%, which marks six consecutive months of negative growth in the cumulative growth rate of industrial enterprise profits. Due to the dual function of the contradiction of previous oversupply and the falling market demands, industrial prices continued to decline to a greater extent compared with previous degree.
The continuing squeeze in PPI will hit industrial production, bringing further downward pressure on the macroeconomy. Data shows thatChina’s above-scale industrial added value calculated at comparable prices increased by 8.9% over the same period last year, down 0.3% percentage points compared with July. From January to August, the above-scale industrial added value increased by 10.1%, down 0.2% percentage points compared with the period from January to July. The persistent decline of the above-scale industrial added value indicates that the economy is still in the process of reaching the bottom and there are still no obvious signs of rebound.
In essence, the trend of industrial added value is driven by downstream consumption and investment demands. Investments in manufacturing are the largest part in fixed investments, accounting for approximately 36% of the total amount. The growth rate of investments in manufacturing in August was down 0.95% percentage points compared with that in July, hindering the growth rate of investments. Corporate profits in the manufacturing sectors continuing to shrink and the higher cost of capital are the main factors constraining investments in manufacturing, while the capacity stress also exerts further pressure on the investments in manufacturing, resulting in the delay of signals of economy seeing the bottom.
Looking from the long-term perspective, the growth predicament thatChina’s industrial production is facing forewarns that the future motive force of growth may be insufficient. Enterprises have to face not only the difficulties of declining growth rates, weakening demands, rising costs and shrinking profits, but also the problems of structural adjustment and transition. Facts show that China’s manufacturing industry has been relying on the elementary basis of high speed growth for a long time and now the changes in international market trends are taking place, leaving smaller and smaller profit margins for ‘Made in China’ which relies on cost-driven model at the lower end of global industrial chain. More and more enterprises will fall by the wayside setting a probable new normality that the Chinese economy will have to face.