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Bloomberg

World faces longer supply shortage as Chinese factories contract

(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 a felt shortage of goods around the world as demand increases. increases. Soaring commodity prices mean “margins are squeezed,” says Li, owner of Huizhou Baizhan Glass Co. Ltd. in southern China’s Guangdong Province, which generates around $ 30 million in sales. annual income. 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 the same period in 2019 , according to official statistics (compared to 2019 eliminates the distortion of pandemic data from last year). Due to the large size of China’s manufacturing sector, this poses a risk to both the country’s growth – which is currently expected to reach 8.5% in 2021, according to a tally from Bloomberg economists – and to a struggling global economy. with supply shortages and rising prices. have a “big” impact on GDP growth this year, said Li-gang Liu, Chinese economist at Citigroup Inc. A fall in investment could hurt imports of capital goods and equipment from economies developed like Japan and Germany, “which in turn could slow down their economic recovery and also rebound,” he added. 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, claims that orders are increasing by up to 30% year over year, but profits are down 50% due to rising costs of materials that 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 gross margin analysis suggests it could go even longer: downstream industries – where the cost crisis is most severe – still have a little cushion. David Qu, Chinese economist For the full report, click here. not able 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 chaotic transition to domestic consumer spending to support their post-pandemic recovery. Exports, China’s strong point last year, may start to slow, as the rollout of vaccines will prompt consumers in rich countries to shift spending toward services. Meanwhile, the growth rate of Chinese consumer spending has yet to fully recover. 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 of over 500 Chinese companies by Standard Chartered Plc. “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, manufacturers targeting Chinese consumers remain largely slack due to subdued domestic demand. Retail sales growth was 4.3% in April on an average basis of two years, which eliminates the base effects of the pandemic, less than half of the pre-pandemic growth rates. Overall capacity utilization of Chinese manufacturers 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. have already built their 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, with their investment growth of 5.3% in 2020 from the previous year easily outpacing the 1% increase in private investment. But for a sustainable investment recovery, the market, not the state, needs to feel confident. Carsten Holz, an expert in Chinese investment statistics at the Hong Kong University of Science and Technology, says private companies have accounted for 87% of manufacturing investment in 2015, the most recent year for which data is available. 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, who exports gardening products from China, said he had to reject 80% of orders this year due to delays at ports. 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 reduce commodity prices and facilitate access to banks. Yet the government continues to phase out fiscal and monetary stimulus measures introduced amid the pandemic last year. He set a relatively unambitious target of “above 6%” growth for this year, and the Communist Party Politburo announced last month that it would prioritize reforms to control house prices and growth in the country. debt. towards reducing risk to the financial sector, ”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 gets underway. cards. While his company of 200 workers hired new permanent staff before the pandemic, for now, he prefers to pass the investment risks on to others. “I wouldn’t do that now, I would rather hire temporary workers and outsource the rest. “, Did he declare. More stories like this are available at bloomberg.com

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