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

Despite recent US-China trade truce efforts, Chinese exporters, particularly smaller firms in non-essential sectors, are facing increasing pressure due to existing tariffs, forcing them to sell at a loss or cut wages to retain US clients. This pressure, evidenced by a 3.6% year-on-year rise in loss-making industrial firms in April and reduced industrial capacity utilization, provides the US with leverage in ongoing trade negotiations. While China's overall export growth shows some resilience, intense competition among manufacturers is driving down prices, and analysts caution that the pain felt by these smaller firms could become a significant concern for Beijing as mitigating factors wane.

Analysis

Despite ongoing efforts to restore a US-China trade truce and roll back tariffs, existing US levies, remaining 30 percentage points higher than last year, are inflicting significant pain on Chinese exporters, particularly small and medium-sized enterprises (SMEs) in non-essential sectors. These firms, such as Jacky Ren's Gstar Electronics Appliance Co., report selling at a loss to retain US clients, a situation described as 'dying slowly.' This pressure is substantiated by official statistics: in April, the number of loss-making Chinese industrial firms rose 3.6% year-on-year to 164,467, constituting 32% of the total, while industrial capacity utilization fell to 74.1% in Q1 2025 from 76.2% in Q4 2024, nearing record lows. This distress, including delayed wages and staff departures as reported by a medical device maker, provides the US with a 'bargaining chip' in trade negotiations, according to Zhiwu Chen of the University of Hong Kong. While China's overall export growth was 4.8% in May, this figure masks intense internal competition driving down prices. Larger firms (annual revenue over 20 million yuan) saw industrial profits rise 1.4% year-on-year in January-April, buoyed by temporary factors like US importers frontloading orders and Chinese fiscal stimulus; however, analysts warn these supports are waning, potentially increasing Beijing's discomfort given its reliance on export-oriented manufacturing for macroeconomic stability.

Key Decisions for Investors

• Investors should exercise heightened caution regarding exposure to Chinese small and medium-sized enterprises in export-oriented, non-essential goods sectors due to severe margin compression and reported cash flow crises stemming from current US tariff levels.
• Closely monitor the outcomes of US-China trade negotiations, as significant tariff rollbacks could offer relief, whereas continued high tariffs or escalations will likely deepen the financial distress for many Chinese exporters.
• Differentiate investment approaches within China, recognizing that while SMEs face acute challenges, larger enterprises or those in strategic sectors may show more resilience, though the overall macroeconomic risk from weakening export sectors is increasing.
• Evaluate potential shifts in global supply chains, as prolonged pressure on Chinese manufacturers could accelerate diversification by international buyers, presenting risks for affected Chinese firms but potential opportunities for suppliers in other regions.