While the US and allies decry China’s industrial “overcapacity” and prepare to sharpen tariffs in response, those embracing links with the factory to the world are getting a hand in their efforts to tame inflation.
China’s producer prices fell for a 20th month in May, government data showed Wednesday, the longest streak since the period over 2012 to 2016. Those lower prices are flowing abroad — shipments have surged while export prices have fallen about 14% since the start of 2023.
While the discounts are crimping profit margins of Chinese manufacturers and fueling trade tensions with US and others, they’re helping central banks in many emerging markets rein in price pressures. Economies benefiting most are those that rely most heavily on shipments from China, especially for goods tied to the housing market that have seen the steepest price drops.
“This disinflationary issue is a double-edged sword. On the one hand, countries could value the disinflationary effect because they’re trying to get their own inflation under control,” said Steven Kamin, a senior fellow at the American Enterprise Institute and a former director at the Federal Reserve Board. “At the same time, import penetration by China has led to an awful lot of political pushback.”
Kamin wrote a paper at the Fed some years after China joined the World Trade Organization in 2001 showing a link between global deflation and China’s cheap exports. The effect has only magnified since then, he said.
And the trend isn’t likely to change anytime soon. China is stuck in a period of deflation amid weak local demand and a property downturn, leaving policymakers reliant on strong overseas sales to meet their growth targets.
The composition of its customers is shifting. China’s shipments to advanced economies made up about 56% of the total in 2023, down from 63% a decade ago, with the proportion to the US declining to about 13% from 20% over that period, according to calculations by Bloomberg News based on data from the International Monetary Fund.
Emerging market “import prices and producer prices are correlated with China’s export prices,” Tatiana Orlova, lead emerging markets economist at Oxford Economics, wrote in a note in April. “We expect Chinese export price deflation to provide a helpful tailwind in the struggle to bring emerging market inflation back to target.”
She nominated Hungary, Russia and Indonesia among key beneficiaries.
The cratering of China’s property sector and dented appetite for goods from glass to steel has led producers to hunt for customers elsewhere. In Indonesia, for example, importers are getting cheaper machinery and more of it. It’s a similar story for buyers of Chinese glass in Vietnam.
While some emerging markets are benefiting from those lower prices, inflation remains sticky in the US and Europe, where protectionist salvos are rising against China. President Joe Biden’s administration has slapped tariffs on some Chinese electric vehicles and solar panels and is seeking to restrict sales of high-end technologies, while the EU is set to announce whether it intends to impose tariffs on Chinese EVs in coming days.
