Chinese Factory Output Plunges As Falling Demand Hits The Sector

Employees work on the production line of a television factory under Zhaochi Group in Shenzhen, China August 8, 2019. Picture taken August 8, 2019.
(Photo: REUTERS/Jason Lee)

China's factory output is deteriorating due to a decrease in payments from customers for the manufacture of their goods and products. The slowdown is the biggest since 2016, based on official data.

The government's producer price index, a key element in monitoring the overall flow and cost of products at factory mark, was down 0.8 percent for the current month, after a 0.4 percent contraction in July. Analysts surveyed by Reuters estimate the PPI to drop unless immediate government intervention is carried out.

While data provided by the National Bureau of Statistics showed the second straight month of retreat, it was moderately better compared to the 1 percent drop estimate in a Bloomberg News poll.

Mining, natural gas, and petroleum, as well as coal and other fuel production segments, led the decline, NBS official Shen Yun pointed out, confirming a broad fragility in manufacturing. Interestingly, consumer price index, a measure of retail instability, was up 2.9 percent in August, improving from the previous month and exceeding forecasts.

Chinese factory-gate prices shrank deeper into the deflationary level and called for urgent measures for commerce ministers to fast-track economic stimulus to stablize the market. Analysts say falling demand both locally and overseas has forced many Chinese enterprises to cut prices to get new orders or balance operational expenses, affecting an already-low profit and consumer confidence.

Consumer prices were likewise generally laggard and only kept afloat by a light flow of nearly half the price of basic commodities like pork whose market has suffered considerably due to an African swine fever that has devastated the country's meat industry, and forced China to start depending on imports.

On Friday, the People's Bank of China slashed banks' monetary reserve requirements to release more money for lending, and economists estimate the central bank to minimize some of its fundamental lending rates in the next coming weeks to cut costs on loans.

PBOC governor Yi Gang recently disclosed that interest rates were justified and that reducing them would put the economy at risk of deflation. However, he reiterated that price swings in the mainland was still normal. A rise in the prices of food, on the other hand, will not be a hindrance to a change in policy, analysts noted.

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