Widening Chinese export price cuts could lead to trade frictions

China’s exports are dropping in price. Unit prices for 70 % of major products such as steel and automobiles have fallen. In terms of the Chinese economy, domestic demand is sluggish and the tendency for companies to sell excess inventory abroad at low prices has intensified. The “export deflation” in China, which accounts for a high share of global production, has the effect of easing inflationary pressures in major countries. However, the low price offensive may also evolve into a new trade friction.

China’s General Administration of Customs (GAC) released November trade statistics (flash report) on 7 December, showing that dollar-denominated exports rose 0.5% year-on-year, turning positive for the first time in seven months. China’s exports to the U.S. saw their first increase since July 2022.

Total exports increased slightly, but at a modest level. This was partly due to an increase in price-reduced goods. Of the 17 categories for which unit prices can be calculated from the Quick Facts of Trade Statistics, 71 % of the categories saw a decrease in unit prices compared to the same period last year. The proportion of price-cutting categories started to rise from autumn 2022 and remained at a high level of 70% to 80% from May 2023 onwards.

Among them, steel prices fell by 40%. In the case of hot rolled coil, for example, the trading price (cost plus freight) in East Asia is 14% lower than the high in March. Piles of steel being shipped overseas from China are depressing prices in circulation in Asia.

Imports of Chinese-produced steel were 3.49 million tonnes from January to September 2023, up 23% year-on-year, according to the Thai Steel Association. Pravit Horungruang, chief executive officer (CEO) of Millcon Steel, a Thai steel company, said, “Thailand’s local production capacity is likely to decline in the future, showing a sense of crisis.”

In addition, the low price offensive of Chinese cars is driving market share expansion. in November, China’s car exports rose 28 %, while unit prices fell 10 %. “Petrol cars that don’t sell at home in China, which make up the bulk of exports, are being exported to the Middle East and Africa at low prices”, said a logistics source.

The price cuts also spread to the downstream of the industrial structure, with home appliances dropping in price by 10%. Domestically in China, home sales have stagnated due to the downturn in the property market. In the consumer price index (CPI), furniture and home appliances have maintained negative year-on-year growth since February, with some analyses suggesting that companies have accelerated the pace of destocking. Bags and shoes also cut prices by 20%.

In addition to China’s sluggish domestic demand, there seems to be an aspect of RMB depreciation against the US dollar, exacerbating the trend of price cuts. There is a view that Chinese companies are using the depreciation of RMB as a boost to reduce prices in US dollar terms in order to improve their competitiveness in overseas markets.

Toru Nishihama, chief economist at Japan’s Dai-ichi Institute of Life Sciences and Economics, noted that it “may help ease the world’s long-running and persistent inflation.”

On the other hand, China’s low-priced export offensive is likely to lead to a deterioration in global price sentiment and corporate performance. China accounts for 50% of the world’s crude steel production and more than 30% of auto production. According to Toru Nishihama, the adjustment in commodity prices may put pressure on the economies of resource-based countries and the performance of companies related to resource development.

China used to expand trade as the “world’s factory”, and in the process exported at prices below the market rate. In the 2000s, it used its abundant and low-cost labour as a weapon to drive down the prices of products such as mobile phones.

In the mid-2010s, when China’s economy slowed down in what has been called the “China Shock,” low-priced Chinese steel, like this one, flowed into Asian markets, causing the global steel market to cool.

At the same time, low-cost exports of Chinese products may also evolve into new trade frictions. The European Union (EU) has begun investigating whether China’s production of pure electric vehicles (EV) with the help of subsidies to sell at low prices, illegal impede competition.

India started anti-dumping investigations against Chinese products in September. It includes chemical products, zippers and fasteners, which are widely used in fiber and paper. According to local reports in Vietnam, the Vietnamese government in September began investigating the impact of imported wind power towers from China on domestic manufacturers.