The China Inventory Problem (Part 1)

In the past week, I've read a number of stories, including a detailed NYT write-up, exploring China's current inventory challenge (i.e., they've got too much). In China, unlike places where government has less influence on manufacturing, slowing production is not as simple as a cascading demand signal to slow output. The challenge of the government's desire to maintain as close to full employment as possible (to avoid unrest) combined with the need to maintain GDP growth at 7% or higher (anything less, we're told, will result in a huge challenge that could crash the red pyramid scheme) has led to recent inventory stockpiles.

A recent Forbes piece summarizes the numbers and core challenge well: "The HSBC Flash Purchasing Managers' Index for August crashed, falling to 47.8, well under the final July reading of 49.3. The dismal result, the first indication of China's economy for this month, was far below 50, which divides expansion from contraction. The final PMI will be released September 3, but it is now clear that August will be the 10th-straight month of decline for the vitally important manufacturing sector in China."

Yet production continues. This has led to the situation the NYT eloquently summarizes in a detailed story on the topic: "China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses." Yet, as the story also points out, "The severity of China's inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government -- all part of an effort to prop up confidence in the economy among business managers and investors."

As we continue our own analysis of the topic, we'll turn our attention to broader procurement strategies focused on China sourcing (for export as well as local production/sales).

- Jason Busch

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