Exporters to China to feel sting of deflation, HSBC analyst says

As China slips back into deflation, exporters to the world’s No. 2 economy will be hit by a double whammy of falling demand and eroding price competitiveness, according to HSBC Holdings Plc’s Frederic Neumann.

While Southeast Asian exporters have suffered from the lack of Chinese demand this year, what’s making it worse is that they are now up against a much more price-competitive mainland Chinese manufacturer, Neumann, chief Asia economist and co-head of global research Asia at HSBC, said in a recent interview. 

It’s the same for exporters beyond Southeast Asia whether they’re from Germany, Taiwan or South Korea, he added.

The competition from Chinese producers becomes evident from a look at data that showed China returned to deflation last month as consumer prices fell 0.2% and factory-gate costs declined 2.6%.

Neumann, who spoke ahead of the latest data, noted that global prices for manufactured goods are also coming down, and this deflation is largely driven by Chinese excess capacity. 

“It’s not just about the big Chinese recovery, it’s also sort of that disinflationary pressure that’s coming out of the Chinese manufacturing sector,” he said, referring to price benefits Chinese manufacturers enjoy from a weaker yuan.

With the onshore yuan at a 16-year low against the US dollar, Neumann sees exporters to China cutting prices just to preserve their market share.

“There’s a more indirect effect on profit margins than necessarily on market share,” he said. “That’s another big headwind.”