Beijing (AP) – China’s stock market is struggling, undermining government commitments to address a price war that has impacted profits and intensified global trade tensions.
The term “anti-volution” is often used to describe the fierce competition and initiatives to control excess production in sectors like solar panels, steel, and electric vehicles.
Increasing trade barriers and factors such as weak domestic demand are pushing manufacturers to slash prices, which is hurting their financial standing and driving some out of the market.
For nearly three years, the producer price index in China has steadily declined, indicating persistent deflation. This ongoing issue is not just a local concern; it has implications for global markets, exacerbating trade frictions with key partners, including the US and Europe.
Solar Panel Glass Manufacturers Agree to Cut Output
Recent statements from the Chinese government and Industrial Association indicate a serious commitment to tackling the intense internal competition dubbed “neijuan.” The leading ten manufacturers of solar panel glass have agreed to reduce production by 30%, with closure of kilns by June 30. Additionally, the government has initiated safety inspections for cars to address quality concerns as manufacturers cut costs.
Whether these initiatives will be effective remains uncertain. Still, indications that China may be addressing these long-standing issues have led to some rebounds in the stock market in affected sectors.
For instance, shares of Liuzhou Iron & Steel Co. saw a 10% increase on Friday, totaling over 70% since June 30. Despite a drop at the end of last week, Changzhou Almaden Co., a solar panel glass producer, has experienced around a 50% increase.
Overall, two exchange funds related to solar panels and steel have grown by about 10%, surpassing the Shanghai composite index’s 3.2% rise.
Performance among electric vehicle makers has been mixed, with Li Auto and NIO showing double-digit gains while market leader BYD saw a decline.
Although foreign investors cannot directly purchase Chinese stocks, they do have access to around 2,700 shares and 250 exchange funds through the Hong Kong Exchange.
Government Calls Price War a Disorder
High-level government calls to address the chaotic price war have been emphasized in recent statements. On June 29, the People’s Daily, a prominent Communist Party newspaper, highlighted that competition was at odds with the party’s aims for quality economic development.
During a recent economic conference, Xi Jinping urged better regulatory practices regarding competition and suggested that local governments should incentivize factory investments, which have been linked to overcapacity in certain industries.
This situation has mainly escalated since late May, especially focusing on the electric vehicle sector, which has been battling a price war for over three years.
Analysts from investment bank UBS mentioned that this shift could be a positive sign for the automotive sector’s profits and stock valuations.
“While a sudden turnaround from fierce competition to orderly integration seems unlikely, a recent truce in price wars could happen,” they concluded.
Weak Demand and Overcapacity Fuel Survival Struggles
After BYD initiated another price cut on May 23, industry players, major associations, and the government called for fair and sustainable competition.
Various associations, including the EV Battery Industry and Cement Association, have released statements urging an end to excessive competition.
The term “regression,” which initially described students and young workers feeling trapped in fruitless competition, now reflects an oversaturated market where too many firms are fighting for market share, leading to drastic price reductions.
A recent article in the Communist Party magazine Qiushi pointed to the gap between production capacity and actual product demand, illustrating the overcapacity that forces firms into fierce competition for survival.
Addressing the Root Issues
Industries like steel and cement in China have long dealt with overcapacity. The push toward greener industries has similarly created issues within sectors like solar panels, wind turbines, and electric vehicles.
China’s export surges have led to increased trade barriers in Europe and the US, as well as in emerging markets like Mexico, Indonesia, and India.
Economists argue that the necessary integration of industries through mergers and bankruptcies will take time, primarily due to state governments’ desire to protect local enterprises and jobs.
Alicia García-Herrero, chief economist in the Asia-Pacific for Natixis Investment Bank, noted that remarks from Chinese economic officials indicate awareness of the need for change. “I’m not sure how much those words mean,” she commented. “But it definitely seems like a significant issue for China.”
