Analysis-As US trade truce gets back on track, some Chinese exporters are 'slowly dying'

Chinese exporters, particularly smaller firms, are facing increased pressure due to U.S. tariffs, with some selling at a loss to retain clients and avoid immediate collapse, as highlighted by kitchen appliance factory owner Jacky Ren. While recent trade talks have led to some tariff rollbacks, U.S. levies remain significantly elevated, contributing to a rise in loss-making industrial firms in China, with 32% of the total operating at a loss in April. Despite overall export growth, intense competition among Chinese manufacturers is driving down prices, and analysts warn that the pain felt by these smaller firms could become a significant concern for Beijing as mitigating factors wane in the coming months.

Analysis

U.S. tariffs are exerting significant financial pressure on Chinese exporters, particularly small and medium-sized enterprises (SMEs), compelling some to operate at a loss to maintain U.S. client relationships, as illustrated by Jacky Ren of Gstar Electronics Appliance Co. who described it as choosing to "die slowly" rather than "die immediately." Despite recent discussions to roll back some restrictions, U.S. levies on Chinese goods remain approximately 30 percentage points higher than the previous year. This sustained pressure is evidenced by a 3.6% year-on-year increase in loss-making Chinese industrial firms in April, reaching 164,467, which constitutes a substantial 32% of the total. Concurrently, industrial capacity utilization declined to 74.1% in the first quarter of this year from 76.2% in the last quarter of 2024. While China's overall export growth of 4.8% in May might suggest resilience, it is undercut by falling prices due to intense competition among manufacturers for subdued external demand. Operational strains are acute, with reports of companies like Candice Li's medical device firm unable to pay wages for months due to U.S. buyers demanding extended payment terms of 120-180 days post-delivery and withholding advance deposits. This pain is predominantly felt by smaller firms in non-essential product sectors. Although larger industrial firms with annual revenues over 20 million yuan reported a 1.4% year-on-year profit increase from January to April, analysts warn that mitigating factors such as U.S. importers frontloading orders and Beijing's fiscal stimulus are likely to diminish, potentially increasing Beijing's discomfort and providing Washington with a bargaining chip in ongoing trade negotiations.

Key Decisions for Investors

• Investors should closely monitor the financial stability of Chinese SMEs in export-oriented sectors, as their distress levels serve as a key indicator of broader economic pressure and potential leverage in U.S.-China trade talks.
• Scrutinize supply chain exposure to smaller Chinese manufacturers, particularly in non-essential goods, given the increased counterparty risk associated with firms reportedly selling at a loss and experiencing severe cash flow issues.
• Exercise caution with investments in companies heavily reliant on tariff-impacted Chinese supply chains, and watch for shifts in Chinese industrial capacity utilization and producer prices for signs of escalating stress or relief.
• Pay attention to evolving payment terms and order patterns in U.S.-China trade, as these reflect the direct financial pressure on Chinese suppliers and can signal shifts in the negotiating power dynamic.