Advertisement

Blog

Weak Overseas Demand for Chinese Goods Causing Jitters

Even China's mighty manufacturing sector is having a hard time escaping the beast known as uncertainty in difficult financial times. Business reports point to growing concerns about slowing demand for Chinese products, particularly in key European and US markets.

Electronics and textiles executives recently told Reuters that, despite China's strong export data in July, they're expecting a drop-off in the coming months. The anticipation is that orders will slow down — and could be cut before Christmas — as Western shoppers keep a tighter lock on their wallets. Also, an appreciating yuan (along with rising labor and raw materials costs) makes exports less attractive in dollar and euro zones.

Sentiment on Wall Street and the euro-zone's preliminary August PMI report echoed this feeling. A Dow Jones article cited Chinese Commerce Ministry spokesman Shen Danyang as saying that China's trade surplus is expected to keep shrinking in 2011, and July's surprise jump in trade surplus was due to rising export prices and lower global commodity prices. China's trade surplus widened significantly in July to $31.5 billion, its highest monthly level since January 2009, as export growth accelerated. The surplus was up from $22.3 billion in June.

In Europe, the first peek at how the manufacturing sector is faring this month in the 17-nation euro region has some mixed news, but observers think it points to a weaker third quarter.

Manufacturing activity contracted in August, according to MarketWatch's read of preliminary purchasing managers index data released Tuesday. The PMI fell to 49.7, down from 50.4 in July, but was above the forecasted 49.5. Fifty is the dividing line marking growth and contraction.

None of this should come as a total shock. It was only a matter of time before the effects of what looks to be another global slowdown reached the Asian tiger's shores. As Matt Sheerin, a supply chain expert and senior equity research analyst and managing director with investment firm Stifel Nicolaus & Co., said during this week's EBN Dialogue: weak consumer and corporate spending, combined with an unclear demand picture, will keep most companies' stock traders and trade officials on nervous guard. He said:

    No. 1 consumer spending has been weak — particularly so in Europe, so concern is that it doesn't come back for a while. Second, slowing GDP could cause companies to take more cautious approach in IT upgrades and other cap ex investments. Bottom line is there is a ton of uncertainty out there and making everyone nervous — the stock market drop in last few weeks certainly is not helping. I would say that visibility into demand outlook seems to be as low as it has been in three years, so this will automatically prompt companies to be more cautious for a while. I also will point out that valuations of companies across the supply chain – public companies are quite low now, even on number cuts, and again this reflects quite negative sentiment from investors.

Given the murky picture for the next few quarters, more questions come to mind. What does a slowdown in Chinese exports really mean to the rest of the electronics supply chain? Will it make more difficult for components suppliers to work off inventory that's building up on their shelves? Will purchasers start looking elsewhere, like Vietnam or Indonesia, for cheaper goods? Let me know your thoughts in the comments.

13 comments on “Weak Overseas Demand for Chinese Goods Causing Jitters

  1. jbond
    August 26, 2011

    It was only a matter of time before China was going to feel some of the effects of the global uncertainty and financial hardships. Many companies are reluctant to spend money and are cutting inventory, not because they are in trouble but because they are being cautious. Some might say too cautious. Some of the weak sales and production numbers are going to be caused by cautious financial decisions and not so much by demand. Nobody wants to get caught excess money tied up in case there is a recession, yet being over cautious could help speed up the process. China is worried because after huge growth over the last few years, they are actually slowing down. This shouldn't hurt their economy and cause companies to seek out other manufacturers.

  2. mario8a
    August 26, 2011

    Hello

    I though his was normal behaivor before to the holiday season, there's a possiblity the weak demand is due to the conservative mind of investors looking very close to forecast and future demand for the 4th quarter?

  3. Taimoor Zubar
    August 28, 2011

    I think the slowdown in the Chinese exports is majorly because of the reduction in global demand. As a consequence of that, as you pointed out, we shall be seeing surplus inventory on the part of manufacturers and suppliers. I think the excess supply will ultimately be leading to a reduction in prices in the upcoming quarter. However, I don't see why purchasers will have to look for alternate suppliers in Vietnam or Indonesia when Chinese products themselves will be getting cheaper.

  4. Ms. Daisy
    August 28, 2011

    This retraction of growth in China is just the begining of a long year to come. I will dare to make a forecast that US consumers will not spend frivolously as they have done in the past not because of the financial uncertainity alone, but because of global uncertainty, and the US political drama that will soon unfold. The big political talks and the fanatism that has polarized the nation will swing into high gear once the congress is back in session in September and the republican primary will feed off of the lack of partnership and collaboration in the 2 houses.

    Each political ideological bickering will end up on the backs of the common American that is either un-employed, employed but uncertain the jobs will remain or just down right disillutioned citizen. All these spells low spending and low demands for products. The Chinese depend on the US consumers mainly to gobble its Goods/products and this is definitely going on the decline because of the uncertainties described above.

    So buckle up and still your nerves for the second global recession is likely to come upon us, and who knows how deep this one will be.

  5. Daniel
    August 29, 2011

    Most of the countries want to promote their own products, so that it’s helpful for both government and industries in many ways. These local industries can generate enough number of employments and an earning way too for many people’s either in direct or indirect way. If they are importing the Chinese products, this equilibrium may be broken and more over it’s may not be acceptable from industrialist. By dumping Chinese product the only advantage is lesser cost, but again we have to compromise for the quality.

  6. Jennifer Baljko
    August 29, 2011

    Ms. Daisy – Hope you're right with your prediction about a slowdown in frivolous US consumer spending… I've long wondered when that would happen and am constantly surprised to read about what people spend money on, when in so many cases people struggle monthly to makes ends meer. And I hope the US political drama is less polarized than we all expect it be, but I know that's probably wishful thinking on my part.

    Often, supply chain activities activities follow patterns that by now should be fairly recognizable by most in the field. Think the Europe-China connection is one of those obvious ripples. What will be curious to see if the solutions run the same predictable course, or if new alternative opportunities are sowed.


  7. Eldredge
    August 29, 2011

    I agree that this should not come as a total shock. Given that a slowdown is real, it should come as no surprise that the manufacturing base in China feels the impact. However, this data does give evidence of a continuing probelm, and our own government should take note.

  8. Himanshugupta
    August 29, 2011

    Jennifer, after reading the article and going through the numbers i think that the problem is more for the China than the rest of the world. As you mentioned, the higher labor cost and higher raw material cost is hampering the export from China. Also the appreciation in Yuan is not helping. I think that industry will have to find an alternate to China's suppliers but i do not see this happening in short term. 

  9. mario8a
    August 29, 2011

    @Jacob

    Maybe in the past, as soon as you read “made in china” you will understand why it failed too soon or why the price is too low, for what I've seen in the last years, China has invest a lot money on improving their quality of goods and their best practices for manufacturing processes.

    I will agree the quality of products made in China might have lower Quality however they have become more competitive and that's the reason why so many big companies invest in China.

    Regards

  10. Mr. Roques
    August 30, 2011

    I agree with you, I remember reading about China's desire to slow down the economy, to slow down inflation, etc. Maybe they didn't warn the industry to slow down as well.

  11. electronics862
    August 30, 2011

    As the market is moving at very slow in united states there is weak demand for imports. This will impact china little harder as most of the products importing in usa are from china. 

  12. Himanshugupta
    August 31, 2011

    Mr. Roques, what's the relationship between the slow economy growth and inflation. Usually countries do not slow growth to curb inflation but do other measures such as increase in interest rates or monetary policy changes.

  13. Mr. Roques
    October 24, 2011

    Well, there's plenty of literature stating there is an inverse relationship between growth and inflation in the short and long run. From a few papers I recently read, that relation is being questioned.

    When production is going at full steam, raw materials, that are probably scarce resources, will tend to increase in price and that, at some point make the price of the final product increase as well, leading to inflation (at least in the short run). Also, as a country grows, its citizens want a better life, so that leads to rising labor costs, which can be a way to increase inflation because that additional cost will be passed to customers.

    That's my logical way of thinking about it, but from what I was reading, there's no empirical data that suggests that.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.