Shuli Ren, Bloomberg
Inside China, price wars are far more dangerous than US tariffs. As President Xi Jinping starts to address the country’s ultra-competitive business culture, the trillion-dollar question is how — and whether he can succeed.
Race-to-the-bottom mentality is everywhere. The world’s biggest EV maker BYD Co. slashed prices by as much as 34% in May, exacerbating a decline in auto prices that began in late 2022. A turf war in the food-delivery market has e-commerce giants Alibaba Group Holding Ltd. and JD.com Inc. offering splashy discounts to take on sector leader Meituan. Hong Kong’s stock market, where these blue chips are listed, has lost momentum as a result.
The government has been talking about curbing “vicious competition” since last July, but there’s a sense of urgency lately. After all, producers’ prices have been on the decline for 32 months, the longest spell in a decade. Industrial profits are set to fall for the fourth consecutive year.
Some early actions — or at least pledges — are taking place. Leading photovoltaic glass producers in the solar industry are reportedly planning to reduce production by 30% starting this month. Large automakers have promised to pay their suppliers, whom they’ve been leaning on to cut costs, within 60 days. Last year, the turnover at BYD was twice as long.
Xi has pulled China out of a deflationary spiral in the past. A decade ago, he targeted capacity cuts in the steel and coal industries. China’s PPI inflation, trapped in negative territory for 54 months, turned positive shortly after his policy pivot.
But this time around, the president has to work a lot harder. Steel and coal companies are largely state-owned. As a result, the government was able to slash capacity by 7% and 13% respectively within two years after the so-called supply-side reform was announced in late 2015.
Unfortunately for Xi, the industries where we’re witnessing the most severe price wars, such as solar panels, batteries and automobiles, are dominated by private enterprises. The Ministry of Industry and Information Technology will have to conduct more frequent and forceful window guidance to clamp down on overproduction.
Second, local incentives are misaligned, and that means municipal governments might continue rewarding businesses that Beijing wants to rein in. Consider the EV industry. In early 2020, cash-strapped startup Nio Inc. received a 5 billion yuan ($787 million) capital injection from Hefei, a mid-sized city in eastern China. The so-called “Hefei model,” whereby local officials behave like venture capitalists but demand their portfolio companies to open factories locally, has served the inland city well.
Stimulus is essential. The much publicized 2015 supply-side reform did not single-handedly lift China out of deflation.
Between 2015 and 2019, the People’s Bank of China provided about 3 trillion yuan of cheap loans to support shantytown redevelopment projects.
This perhaps explains why an unverified social media report last week of a possible high-level meeting that would be reminiscent of the Central Urban Work Conference held in 2015 got traders excited about unloved property stocks. Investors know that supply measures alone can’t lift China — and that top policymakers know that, too.
To stop the rat race, Beijing’s bureaucrats need to coax private businesses into production cuts, tell local officials to behave, and steel themselves for another fiscal bazooka only a decade after the last one. As Xi hunkers down with senior politicians laying out priorities for the next five years, he’s got his plate full. [Abridged]
Courtesy Bloomberg/Shuli Ren
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