Soaring CPI puts squeeze on manufacturers

A 34-month-high consumer price index (CPI) in May has left little maneuvering room for manufacturers and required them to get stronger, more efficient and more creative, experts said on Tuesday. 

The National Bureau of Statistics (NBS) reported on Tuesday on the major economic indices of the country in May. In line with market expectations, China's consumer price index (CPI), an indicator of inflation, hit 5.5 percent, up 0.1 percentage points from April, because of severe imported inflation largely driven by the rising international prices of grain and petroleum. 

China's producer price index (PPI), which measures upstream inflationary pressures, soared 6.8 percent from a year earlier, up 0.3 percentage points from April. 

"The rising costs of labor and raw materials are squeezing small and medium-sized manufacturers, and we can hardly do anything to reverse this trend," said Zhou Dewen, chairman of the Wenzhou SME (small and medium-sized enterprise) Development Association. 

Members of the association find it more difficult to sign contracts. "This is the time for industrial associations to take action, to discuss their current situation, make suggestions to the government and seek government support," Zhou said. 

So far, Zhou has directed the association and its members to research their options. He said the association is trying to get more help from the government, including lower taxes and easier financing. Apart from channeling the pressure to downstream consumer products, to keep their heads above water, the enterprises have to get stronger, he said. 

Ma Guoshui told China Daily that his textile company in Shaoxing, Zhejiang province, has similar difficulties. His answer is to be creative and produce more value-added products. 

"Our exports slid 10 percent in 2010, but thanks to the efforts of our research team, our newly developed products drew more orders and commanded an even higher price because they are more popular and competitive in the market," Ma said. 

Ma's company exports up to 10 million yuan ($1.54 million) in textiles to Europe and the US every year, and he believes expertise is the key to success in times of economic hardship. 

"To battle with the rising costs, my advice to manufacturing companies is to raise prices in the short term and shift the business mode in the long term," said Liu Shengjun, deputy director of the Lujiazui International Finance Research Center, which is affiliated to the China Europe International Business School. 

"Rising costs are eroding manufacturers' thin profit margins. If they pass on the price pressures to consumers, that will lead to higher CPI," Liu said. 

But Liu stressed the importance of moving up the value chain to produce high-end competitively priced products, a win-win strategy for the domestic market. 

"Just like the success of the iPhone and iPad, consumers care less about the price because they are more trendy, novel, and functional. At the same time, the US government does a good job protecting intellectual property rights. If Chinese companies can produce such products, they won't have to worry about profit," Liu added. 

Amid the industrial transformation, experts are calling on the government to act to help domestic manufacturers, as outlined in the 36 articles the State Council released last year to encourage and guide private investment and expand the investment spectrum. 

A number of Asian countries are currently experiencing inflationary pressures as a result of rising food prices. Inflation is part and parcel of high growth, and China has sustained high levels of economic growth for more than two decades, said James Macdonald, head of China research at Savills. 

To offset the effects of inflation, individuals are deciding to invest in products that are deemed to move in step with inflation, such as real estate. 

As a result, real estate investment continued robust its growth and reached 1.87 trillion yuan ($288.55 billion) in the first five months of this year, up 34.6 percent from a year earlier, according to the NBS. 

Jing Ulrich, JP Morgan's managing director and chairman of global markets for China, predicted that the nation's CPI will continue to rise in June and July, but gradually fall below 5 percent from September.