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The world is facing a prolonged supply shortage as China’s factories have come under pressure

(Bloomberg) – Eric Li’s factory, which makes glass lampshades for companies like Home Depot Inc., is reaching its limits as sales double pre-pandemic levels. But like many Chinese manufacturers, he has no plans to expand operations – a reluctance that could slow the pace of Chinese economic growth this year and prolong the global shortage of goods if demand picks up. Rising raw material prices mean that “margins are being compressed,” said Li, owner of Huizhou Baizhan Glass Co. Ltd. in the southern Chinese province of Guangdong, which has annual sales of around 30 million US dollars. With the global economic recovery still being mixed, “the future is very unclear so there is not much pressure on capacity expansion,” he adds. The combination of higher input prices, uncertainty about export prospects and a weak recovery in domestic consumer demand meant for Chinese people According to official statistics, investment in manufacturing from January to April was 0.4% below the same period in 2019 (compared to In 2019, the biases of the pandemic data from last year will be removed). Given the enormous size of China’s manufacturing sector, this poses a risk to both the nation’s growth – which is currently projected to reach 8.5% in 2021, according to a Bloomberg balance sheet by economists – and a global economy plagued with supply shortages and rising prices fighting has had a “significant” impact on GDP growth this year, said Citigroup Inc. Chinese economist Li-gang Liu. Lower investment could affect imports of capital goods and equipment from developed countries like Japan and Germany, “which in turn could affect their economic recovery and recovery,” he added. AnHui HERO Electronic Sci & Tec Co. Ltd. is one of those companies are feeling the pressure. Headquartered in eastern Anhui Province, the company manufactures capacitors for electronic circuit manufacturing and mainly sells in the domestic market. Jing Yuan, the founder, says that orders were up as much as 30% year over year, but profits were down 50% as the cost of materials increased, which cannot be easily passed on to customers, it has to be a half Paid month in advance of delivery to secure copper and other metals they had previously paid for months after receipt, he said. “The raw materials problem needs to be addressed by the government,” he added. What Bloomberg Economics says … The Chinese industry is absorbing significant cost pressures from rising raw material prices and dampening the inflationary effects for the rest of the world. Will it take? Our gross margin analysis suggests that this may take a while: Downstream industries – where the cost crisis is most severe – still have a small cushion. David Qu, China economist. For the full report, click here. They cannot use their existing facilities, so adding them would be of little use. Chinese electric vehicle manufacturer Nio Inc. stopped production at one of its plants last month due to a shortage of microchips. Modern Casting Ltd., a manufacturer of iron and steel products in Guangdong, issued a notice to customers this month that it has not been able to fulfill its current orders due to high raw material costs. An employee who answered the phone in the company’s office confirmed the tip but declined to provide further details. Growth Transition In addition to higher input costs, Chinese companies are facing a bumpy transition to domestic consumer spending to sustain the post-pandemic recovery. Exports, China’s strong point last year, could slow as the introduction of vaccines pushes consumers in rich countries back to services. Meanwhile, the rate of growth in Chinese consumer spending has not fully recovered. Investment sentiment among Chinese small and medium-sized enterprises is below the level of 2018-9, when uncertainties from the trade war between the US and China put a brake on expansion plans. According to a regular survey conducted by Standard Chartered Plc of more than 500 Chinese companies, “Demand is still largely driven by exports, so domestic companies are aware that this is unsustainable,” said Lan Shen, China economist for Standard Chartered . The oriented sectors have reached their limits and manufacturers targeting Chinese consumers still have a lot of leeway due to subdued domestic demand. Retail sales growth averaged 4.3% in April, removing the base effects of the pandemic. less than half the pre-pandemic growth rates. Overall capacity utilization by Chinese manufacturers fell from 78.4% in the last three months to 77.6% in the first quarter, with the automotive sector being hardest hit by overcapacity after three years of declining sales volumes. Even with electric vehicles, which are growing rapidly, most companies have already expanded their capacities and will now focus on incremental upgrades. “Most of the investments were made,” said Jochen Siebert from JSC Automotive Consulting. China ordered state-owned companies to expand last year. The year-on-year investment growth of 5.3% in 2020 significantly exceeded the 1% increase in private investment. For a sustainable recovery in investment, the market and not the state must feel confident. Carsten Holz, an expert on Chinese investment statistics at the Hong Kong University of Science and Technology, estimates that privately owned companies were responsible for 87% of manufacturing investment in 2015, the last year of available data. They are more sensitive to input costs. “In the face of a new US administration, there is a pandemic and uncertainty about future trade, none of which is conducive to investments that are based on long-term growth prospects,” said Holz Challenge for export-oriented manufacturers. Gordon Gao, who exports garden products from China, said he had to turn down 80% of orders this year due to port delays. In one case, an order placed before mid-February could not be shipped until three months later when a customer finally secured a container. Beijing has sought to improve conditions for private companies by taking action against speculation to contain commodity prices and facilitate access to bank-ordered loans. However, the government continues to gradually withdraw fiscal and monetary stimulus measures launched in the wake of last year’s pandemic. A relatively ambitious target of “over 6%” growth was set for this year, and the Communist Party’s Politburo signaled last month that it would prioritize reforms to control house prices and debt growth. “The political stance has definitely shifted from supporting growth and back to reducing risk in the financial sector,” said Adam Wolfe, an economist at Absolute Strategy Research in London. “Risks to economic growth appear to be on the downside, especially for capital-intensive, construction-related sectors.” Manufacturers like Li will need a longer period of domestic growth and control over input prices before capacity expansion begins cards. While his 200-strong company was hiring new permanent employees before the pandemic, he would prefer to pass the investment risk on to others for the time being. “I wouldn’t do that now, I’d rather hire some temporary workers and outsource the rest. More stories like this are available on bloomberg.com. 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