By Liangping Gao, Ellen Zhang and Casey Hall
BEIJING/SHANGHAI (Reuters) -Eno Qian, who runs a clothing factory in eastern China, says she makes a 20 yuan ($2.74) profit for every item she sells abroad and only a tenth of that on domestic sales, making a shift to the local market “not viable” for her tariff-hit business.
Beijing has made increasingly louder calls on exporters to find local buyers as an alternative to the U.S. market, now frozen after Washington hiked tariffs on Chinese goods by 145%, but firms are concerned about complications in making the switch.
Many export-reliant factories have decried weak domestic demand, price wars, low profits, payment delays and high product return rates in the Chinese market.
Qian said she has “decided not to pursue domestic sales,” because of thin margins and “cash flow risks” caused by Chinese retailers not paying bills on time, or demanding to return unsold items.
“Foreign partners are more stable.”
These difficulties highlight the world’s second-largest economy’s over-reliance on exports for growth and the urgent need for measures to boost consumer incomes, analysts say.
Without fiscal stimulus that boosts domestic demand, any increase in product supply in the Chinese market may even backfire, by squeezing businesses and intensifying deflationary pressures, they say.
“In China, due to furious competition, the margin is very, very thin, or almost sometimes zero, which could cause some exporters to go out of business if they pivot to the domestic market,” said He-Ling Shi, economics professor at Monash University in Melbourne.
“This will further make the consumption power worse, because if people go out of business, obviously they don’t have income to buy in the domestic market.”
China’s commerce ministry said this month that one of its key strategies to mitigate the impact of U.S. President Donald Trump’s tariff hikes was to support exporters to sell more domestically.
The ministry has since organised “matchmaking” events across China, including in Beijing, Guangzhou and Hainan island, bringing together manufacturers and e-commerce platforms, supermarkets and other retailers to see if deals can be struck.
Local governments are forming special task forces to find solutions for the problems raised by exporters, including what officials identified as “unfamiliarity with the domestic market, lack of operational experience, and low brand awareness.”
CALLS FOR STIMULUS
E-commerce giant JD.com has said it would launch a 200 billion yuan ($27.35 billion) fund to help exporters sell their products domestically over the next year. It said nearly 3,000 firms have already made enquiries – about 0.4% of Chinese companies engaged in foreign trade.
Delivery firm Meituan has also said that it will help exporters with marketing and in other areas.
But Qian said what she actually needs is support “in terms of taxes and subsidies.” She lost 30% of sales as a result of U.S. tariffs and has had to cut staff.
“In the worst-case scenario, we may have to shut down the factory,” said Qian.
David Lian, who manages an underwear factory in southern China, says the domestic market is “extremely price sensitive, with high promotion costs and frequent returns.”
Foreign clients place large wholesale orders, while the Chinese market is primarily “retail and small batches,” he said. He is looking for new customers in the Middle East, Russia, central Asia and Africa.
Liu, who exports lighting products out of a factory in the eastern city of Ningbo and only gave her surname, said she would need to hire a separate team to push domestic sales.
“We are a small firm and don’t have the energy for that,” she said.
The Communist Party’s elite decision-making body, the Politburo, is expected to meet this month and efforts to support exporters’ domestic shift will likely feature in the state media summary of the discussions.
Shi, the professor, says this would mainly serve to project strength to the domestic audience and defiance to Washington. Economists are more focused on any concrete demand-side stimulus steps.
China’s retail sales last year amounted to 43.2 trillion yuan ($5.92 trillion), more than 11 times its exports to the U.S. of 3.7 trillion yuan.
Theoretically, a 2 trillion loss in U.S. sales over the next two years could be offset by a 4% rise in consumption over the same period, Capital Economics analyst Julian Evans-Pritchard estimated.
But, he said, consumers won’t dip into their savings if they don’t feel confident about the economic outlook or unless the government commits to more generous social benefits. Alternatively, wages have to rise at a fast pace, which is unlikely given the tariff blow on employers, he said.
“Measures tied to the social safety net, particularly pension and fiscal reforms long overdue, are key,” said Minxiong Liao, senior economist at GlobalData.TS Lombard APAC.
($1 = 7.2976 Chinese yuan renminbi)
(Writing by Marius Zaharia)
Comments