Because core CPI increased. Main decrease is energy.
Chinese Economics Thread
- Thread starter Norfolk
- Start date
Companies usually lose money until the price falls to the "cash cost", which is already a big loss.
Competition in China is so fierce that it's the only place I've seen prices below the cash cost.
There's no justification for this madness. The fact that the political leadership is already expressing its discontent is a good sign.
I hope that the political leadership and industrial leaders can find a way to stop this spirit of suicidal self-destruction in which everyone believes they can be the only survivor.
I think recognizing the problem is already a big step, and it gives me hope for healthier industrial development in China.
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"China's President Xi Jinping on Tuesday vowed to tighten oversight of aggressive price-cutting by domestic firms, amid growing concerns over persistent deflation.
According to state news agency Xinhua, overcapacity and price wars among Chinese manufacturers affect consumer behavior and risk deepening deflation, which could derail efforts to stabilize the economy.
"Enterprises engaging in disorderly low-price competition must be regulated under laws and regulations," said a statement from the Central Financial and Economic Affairs Commission, chaired by Xi."
Competition in China is so fierce that it's the only place I've seen prices below the cash cost.
There's no justification for this madness. The fact that the political leadership is already expressing its discontent is a good sign.
I hope that the political leadership and industrial leaders can find a way to stop this spirit of suicidal self-destruction in which everyone believes they can be the only survivor.
I think recognizing the problem is already a big step, and it gives me hope for healthier industrial development in China.
---
"China's President Xi Jinping on Tuesday vowed to tighten oversight of aggressive price-cutting by domestic firms, amid growing concerns over persistent deflation.
According to state news agency Xinhua, overcapacity and price wars among Chinese manufacturers affect consumer behavior and risk deepening deflation, which could derail efforts to stabilize the economy.
"Enterprises engaging in disorderly low-price competition must be regulated under laws and regulations," said a statement from the Central Financial and Economic Affairs Commission, chaired by Xi."
I dont think thats the point i was trying to make. We are talking about a situation where companies are engaged in such price competition that even the meagre profit margin any company in the world needs to keep going are affected more and more. Some company are even selling at cost price of the product with zero profit margins(some even at a loss) just to stay competitive and remain in the market, this is not sustainable since it even forces the most competitive and innovative companies to be left with no choice than to follow this trend thus engaging in a situation which is not productive for the countries industries, something which is not sustainable.
There is a very good reason the Chinese government is finally hitting a hand on the table for companies to stop such unsustaible price competition. Since its gotten to the point that companies are more and more focused on competing on price for the most part to the detriment of other sectors.
The chinese government is not stupid to call for such practices to stop. Do you think the CCP is not happy to have prices of all goods as cheap as possible for Chinese people, even if Chinese companies are making zero profits? Of course the party would love that in an ideal world where it doesnt affect the producers, however they know the effects won't be good for the country's industrial sector in the long term since its not sustainable way to run an industry. chinas leader have called it "disorderly competition/involution" and “ rat race-style’ competition for a reason. They have called for companies to focus more on improving product quality than only low price to compete..
I agree with the chinese government. There should be a minimum threshold were prices should stop being lowered, when it eats on companies profits to the point where companies think the only way they can remain in the market is by selling at a loss IRRESPECTIVE OF HOW GREAT AND BETTER THEIR PRODUCT IS RELATIVE TO THEIR COMPETITION then it isn't a good model . There should be a mininun level og inflation(not too high not to low) so there needs to be a middle point where both consumers and producers are doing well. Hence the reason the government is obliged to step in like they are doing now. Im sure they have analysed and noticed this trend as well. They know the country economy and state better thsn you and me, so i believe they are calling for this practice to stop for a good reason. So you shoulf trust them nore on this .
Deflationary pressures have led Chinese authorities to address overcapacity in key sectors, but the latest round of industrial restructuring appears to be a watered-down version of the sweeping supply-side reforms launched a decade ago, which were instrumental in ending a deflationary spiral.
Current "anti-devolution" policy measures—aimed at curbing disorderly competition in sectors such as the automobile industry—are expected to begin raising the annual PPI starting in August.
The obvious macroeconomic response to deflation is to boost aggregate demand, encouraging households to increase consumption. Investment in this situation will only tend to increase overcapacity.
Rather than accept this macroeconomic recommendation, the Chinese government has responded to the growing signs of deflation with a misleading narrative about the need to regulate excessive competition. The clearest example of such "excessive" competition, especially for journalistic commentary—here the term "hook" is truly appropriate—is found in the Chinese electric vehicle industry. BYD, a world leader, recently surprised its competitors with the introduction of a new entry-level model, the Seagull, to which it is applying unprecedented price discounts.
Containing BYD's efforts to crush competition would not eliminate the deflationary risk in the Chinese economy. However, it is equally clear that for deflation to occur, companies must lower prices; therefore, to prevent deflation, companies must be convinced that they do not need to continue to reduce prices.
From a macroeconomic policy perspective, the question is how to ensure sufficient aggregate demand so that the enormous productive potential of new technologies does not become a curse, but rather a means of driving sustainable economic growth.
Politburo, Xi and rest of the top leadership are all saying for the last few months that deflation is no longer welcome and that 内卷 is bad.
Deflation is the easiest thing to get out of for a country like China who has among the lowest staples and white goods prices in the world if it wanted. It can simply print money and there is a lot of buffer for price increases with the low base.
So why doesn't it simply do that? Because unlike the Western press, deflation is not that much of an issue for the Chinese government. It wants to curb excess competition but part of that comes from letting companies fold or consolidate during exactly these kinds of price wars. The only issue is municipal governments supporting weak firms and that is what they are worrying about in excess competition.
Deflation is just another codeword for the "overcapacity" narrative. It is something that is defeated by increasing money supply. It is something that any government -- not in fear of hyper-inflation -- could handle pretty easily with the printing press. If a government like China, who has the ability to pump M2 into its economy beyond that of any other country in the world if not in history, doesn't chose to handle this by simply drowning deflation with cash is a sure sign that deflation is not a concern.
What is a concern is the possibility of further geopolitical embargoes so the need is to produce more and across more categories. Yes, all that production will cause deflation but it is a side effect of needing to dealing with a national security imperative.
So why doesn't it simply do that? Because unlike the Western press, deflation is not that much of an issue for the Chinese government. It wants to curb excess competition but part of that comes from letting companies fold or consolidate during exactly these kinds of price wars. The only issue is municipal governments supporting weak firms and that is what they are worrying about in excess competition.
Deflation is just another codeword for the "overcapacity" narrative. It is something that is defeated by increasing money supply. It is something that any government -- not in fear of hyper-inflation -- could handle pretty easily with the printing press. If a government like China, who has the ability to pump M2 into its economy beyond that of any other country in the world if not in history, doesn't chose to handle this by simply drowning deflation with cash is a sure sign that deflation is not a concern.
What is a concern is the possibility of further geopolitical embargoes so the need is to produce more and across more categories. Yes, all that production will cause deflation but it is a side effect of needing to dealing with a national security imperative.
This isn’t at all how China increases prices, they use regulation to do things like mandate higher quality, or they build supporting infrastructure, or they increase quotas, what they don’t do is print money.
Deflation does not only come from internal price competition. It could come from productivity improvements, displacing expensive foreign products.
If china makes cheaper semiconductor equipment within china comparing to products from asml and japan. That is bad because it is price deflation?
There is a geopolitical aspect of economics. In a closed system, you loosen monetary policy if there is deflation. To kill expectation of continue deflation, this step needs to signal a policy change, so big and bold steps need to be taken. However, we are dealing with an open system, so one country loosening monetary policy helps the entire world. Since the U.S. considers China an adversary, it stands to reason that any large monetary loosening by the Chinese must predicate on a deal with the U.S. Until that happens, whichever country unable to hold on will have to make bigger concession to the other. The Chinese must have determined that current deflation can be addressed without bold steps of monetary loosening. Once a deal is struck between the U.S. and China, I expect a synchronized loosening of monetary policy by both sides.
Using Occram's Razor -- that the most direct and obvious answer is usually the correct one -- the Chinese government sees deflation that comes from increasing productivity across existing and new fields as a by-product of expansion into high value manufacturing. It is not something they are overly concerned with. It is that simple.
They can drown deflation with any number of schemes to increase money supply but deemed it not worth the cons (the biggest one of which in increasing M1/M2 is inflation!)