US President Donald Trump's renewed tariff fight with China is set to worsen a major problem facing the world's second-largest economy; according to economists, an abundance of cheap goods is beginning to emerge across the country due to insufficient demand; many businesses are considering reducing production rather than cutting prices.
From steel rebar producers to furniture and solar panel makers, many Chinese manufacturers have started to incur losses after slashing prices to compete for market share, Nikkei Asia reported, citing economists. As of the third quarter of 2024, more than 23 percent of China’s publicly traded companies were incurring losses, compared with 19 percent in 2023 and less than 20 percent in 2019, before COVID-10, according to Nikkei Asia analysis based on data from Wind Information.
Economists warn that Trump’s imposition of tariffs of 400% or more on more than $10 billion worth of Chinese exports risks pushing more manufacturers over the edge or accelerating the relocation of production out of China, threatening to further damage an already fragile job market and exacerbate deflationary pressures at home.
“Shipping goods to third countries may protect Chinese manufacturers from the shock of tariffs,” said Chen Zhiwu, a finance professor at the University of Hong Kong. “But it is not necessarily positive for the Chinese economy because it takes away business opportunities.”
Beijing has been reluctant to move away from supply-side fueling, in part because of China’s investment-heavy growth model and President Xi Jinping’s stated dislike of a consumption-driven economy. But with insufficient demand to absorb their output, manufacturers are cutting prices to stay competitive at home and abroad. This has led to what the Chinese leadership sees as a vicious cycle of low profits and weak demand reinforcing each other, with cost-conscious companies restricting new investment and laying off workers.
As the phrase “involutionary vicious competition” to describe the fierce competition gained popularity, the government vowed to rein in the behavior in December. That month, more than 30 solar panel makers began cutting production instead of cutting prices in an effort to stem losses across the industry. Similarly, in November, the China Industrial Power Sources Association urged lithium battery makers to avoid “vicious competition.”
Economists say Beijing needs to do more than push companies to avoid price wars and focus on increasing the role that consumption plays in the economy. “As long as there are more competitors, it’s very difficult to sustain these cartel agreements,” said Kelvin Lam, senior economist at Pantheon Macroeconomics. “The bigger problem is lack of demand.”
Exports have been one of the few outlets that have eased the pressure. As long as China’s internal imbalances persist, companies will continue to rely on overseas shipments, said Robin Xing, chief China economist at Morgan Stanley. But the hurdles are rising fast. “Lowering tariffs and a long-term trend toward multipolarization mean potentially lower addressable market growth relative to capacity growth,” Xing warned.
