Investors looking to gauge the health of global consumer sentiment should look no further than China’s factories right now.
Makers of Christmas decorations for clothing and tents say orders from overseas customers are drying up, and some predict the best they can aim for is flat demand compared with last year, according to more than a dozen export executives interviewed by Bloomberg News. The snapshots from factories in key Chinese hubs indicate that households around the world, already tightening their belts to face a rapid rise in the cost of living, may be cautious for longer, weighing on warnings of a potential global recession.
“Consumers don’t have money to spend with soaring inflation” and the drop in demand has happened suddenly, said Wendy Ma, a marketing manager at a textile manufacturer in the eastern city of Ningbo. Orders for items including buttons, zippers and sewing thread fell about 30 percent in July and August from a year earlier as demand from major markets such as the United States and Europe fell, she said.
The reports from manufacturers suggest that the resilience seen in China’s export data may be fading. That said, the boom has been helped somewhat by price growth as well as Chinese manufacturers compensating for delays from pandemic shutdowns and orders that were accelerated in light of ongoing supply chain distortions.
“The general direction is that export growth will slow in the coming months and it is possible to reach negative territory by the end of the year,” said Larry Hu, head of China economics at Macquarie Group Ltd. Still, the decline in demand for China-made goods will be gradual, rather than a collapse, he said.
The waning strength of exports could add another blow to a Chinese economy that is already showing a slowdown in some aspects. China’s central bank unexpectedly cut its key interest rates on Monday to boost support as official data showed retail sales, investment and industrial production figures for July all missed economists’ estimates.
Headwinds have been slowly building for several months. Clark Feng, whose Vita Leisure Co. buys tents and furniture from domestic manufacturers to sell abroad, said export orders have fallen since March and European customers are only asking to buy about 30 percent to 50 percent of what they wanted last year. Workers in some of the factories he sources from have been laid off or sent on vacation, something he has not seen in his decade in the business.
Foreign customers want to clear existing inventory rather than order new products, Feng said. “Our products were very popular last year, and now we are swinging from one extreme to another, and demand is even lower than pre-pandemic. There is a sense of panic.”
Over the past year, inventories at companies in the S&P consumer discretionary and consumer staples indexes rose by $93.5 billion, a 25 percent increase, according to data compiled by Bloomberg. It came as companies ramped up purchases in 2021 to cope with lengthy delivery delays and as some front-loaded their Christmas orders.
It also coincided with a shift in global consumer spending towards services, rather than goods, as travel demand increases in many parts of the world. Retailers such as Walmart Inc. and Target Corp. reducing prices on items such as clothing and home goods, even as they charge more in other categories amid soaring US inflation.
Many retail buyers must lock in orders in advance, meaning a decline now is a sign that consumer demand could be weak for months, according to some firms.
Joe Kwok, general manager of Shanghai-based textile and clothing maker Hengda Printing & Dyeing Co., said his top sportswear and retail customers have cut orders by as much as 30 percent since June. He predicts that demand will remain low for a year or two.
Chinese manufacturers will find it difficult to make up for the foreign deficit in the domestic market. The country’s adherence to Covid Zero, which includes sudden shutdowns, constant testing and movement curbs, has weighed on consumer sentiment and wreaked havoc on the manufacturing sector.
Yiwu, the world’s largest hub for Christmas goods from tree decorations to plastic reindeer, shows how precarious business can be.
Over the weekend, the city extended a lockdown that continues to ban most residents from leaving their homes as the outbreak that began this month topped 630 infections. The city was also locked down in April, but the latest restrictions are a major setback for manufacturers in the middle of what is usually their busiest season for production and shipping.
Exporters have learned from past disruptions and have sped up delivery schedules by a month or more in anticipation of uncertainty, according to Cai Qinliang, secretary general of the Yiwu Christmas Products Industry Association, which has 200 members that own 500 to 600 factories.
But that’s not enough to support a full recovery. Cai said Christmas-related business was cut by more than half in 2020 as the pandemic disrupted global trade and major customers canceled orders. Sales improved last year, but were still 20 percent to 30 percent lower than before the pandemic, and may stay at that level this year, he said.
It’s a situation mirrored 250 miles to the north, where Melissa Shu said she has gone from working overtime last year at a maker of LED car lights in the city of Zhenjiang to facing an order book that has fallen by at least a third.
Customers “are acting with great caution,” the export chief said. “The macroeconomic environment is weak – the war, the inflation, the living crisis – none of us can escape.”
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