Price Hikes are Being Mulled by China’s Factory to the World

After years of undercutting rivals with cheaper costs, China’s factories may be on the cusp of delivering a new shock to the global economy. Increases in prices could reverberate around the world this time.

Now caught in a squeeze between surging wages and tepid demand consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd. to understand why. In order to survive,  the company has already automated production, slashed staff by half and shaved prices. Now it’s weighing the first price increases since 2010 with margins razor thin, reports Bloomberg.

“There’s just no possibility for me to cut prices any more. Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit,” says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province.

Last week at the Canton Fair in Guangzhou, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts, exporters of everything from clocks to jacuzzis interviewed shared the common intention to push to recover lost margins even as demand remains muted.

A source of disinflationary pressure is removed for the world economy by decisions from companies like Jiangmen Tissue to stop cutting prices — and even raise them where demand allows. Te question to be decided is whether China swings from becoming a drag on consumer prices to a source of pressure nudging them higher.

For the first time in almost five years, the overall producer prices clambered out of negative territory and China’s manufacturing prices rose in September. The country’s top five markets: the U.S., Hong Kong, Japan, South Korea and Mexico, would be the ones likely to feel the biggest lift if Chinese export prices follow through with sustained increases.

“China’s return to positive growth in producer prices marks a very significant turning point in deflationary pressures both in China and globally. This is only step one, though. We are still waiting for step two: stronger global demand and trade,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

Countries including Japan at almost 25 percent of total imports and Australia with about 23 percent, where imports from China account for a large percentage of the total also will be affected.

“It will impact on Australian import prices, a lot of those consumer durables such as household appliances and big-screen TVs that we like to import. It does add to that range of indicators that suggest we are round about the low point for inflation,” said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation’s biggest lender.

With the International Monetary Fund warning this month that the risk of persistent deflation in some advanced economies has risen, headwinds to inflation remain strong, with global demand weak.

While deflationary trends were on display Friday with data showing Japan’s consumer prices fell for a seventh straight month in September, a 10 percent slump in China’s September exports underscored the funk.

“It’s no coincidence that China let the exchange rate weaken last year when deflationary pressures were high. While they may not have slayed the deflationary beast, they have at least wounded it,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles.

(Adapted from Bloomberg)

Categories: Economy & Finance

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