CHINA's Losses Spiral

Hi, welcome back to the channel. In this episode I want to talk to you about what's happening in the Chinese economy because you may have seen headlines like this that says China's trade ends 2025 with record 1.2 trillion surplus despite Trump tariff jolt and you might think hang on a minute that Joe Blog's guy told me that China was doing really badly but actually this is a record breaking year he's talking a lot of rubbish but I wanted to go through the details of it because don't just read what you see in the headlines and assume that everything is going fine because that's what a headline is for somebody who's writing that article tries to pick out what they think will be the alarming message that they can put in there that everybody will go wow I never expected that and in the same article we've got this graph which shows a fantastic outcome you can see exports rising at a faster rate than imports which produces a huge trade surplus the yellow bar chart at the bottom shows you that the trade surplus is now over 1 trillion dollars so all of this looks fantastic news at face value but you need to understand what these figures are talking about and look into the detail that's the whole point of why I'm making these videos to get you thinking about things not just reading an article and saying oh well China's doing really well that's weird because I thought they'd be doing badly because of the Trump tariffs it's a bit like if I went into competition with one of the biggest companies in the world and constantly undercut them on price I might win all of the contracts I might become the world's biggest player in a certain market but if I can't make any profit then I'm going to go bankrupt and the whole point of what's going on in China is that whilst they might be selling some of their goods they're selling more and more stuff are the companies actually making any profit or are they making losses well in the rest of this video I'm going to go through all of those details but before we do that could I just ask anybody that hasn't subscribed yet to please smash that subscribe button doesn't take you a second and it helps me with the algorithm also puts a smile on my face and also I wanted to remind you that I'm currently running my competition whereby you can win my house located close to one of the best beaches in the UK or £250,000 in cash it's another way of supporting the channel so if you'd like to get involved please have a look at the QR code on the screen now or click the link in the description below this chart shows what's been happening with exports in China over the past 12 months you can see that the year-end outcome in and that was broadly speaking in line with where a lot of the exports have been throughout the whole of this year some months have been up some months have been down so I don't think the year-end figure is anything to report home about in terms of it's not a huge surge towards the end of the year but the most important metric when we're looking at exports is what's going on with producer prices are Chinese companies making more profit today than they were this time last year now as I've said in many previous videos over 50 percent of Chinese companies are currently making losses and we're going to go through the reason why just now this chart shows the year-on-year movement in producer prices and producer prices are basically factory gate prices the price that companies are selling their products for and as you can see from the scale on the right hand side here it starts at zero percent and goes down to minus 3.7 percent and in every single one of the past 12 months producer prices factory gate prices have fallen in China and in December they fell year-on-year by 1.9 percent and if we widen the scale of this chart to show what's been happening over the past three years you can see that producer prices have fallen in every single month in the past three years so Chinese companies are constantly cutting the price of what they're selling to keep winning more and more business so one of the reasons why they've cut their margins is because of tariffs so as Donald Trump has applied tariffs onto Chinese goods some Chinese companies have reduced the price that they're selling those goods for to partially offset some of those tariffs and Chinese companies are doing this all across the world not just because of the tariffs in the USA. Now I want to talk about what the year-on-year impact is here because if you cut your prices last year and the year before and the year before that then obviously overall your price is going to be down by more than 1.9 percent so as I said in December 25 prices fell by 1.9 percent that was on top of a 2.3 percent fall in December 24 a 2.7 percent fall in December 23 and a 0.7 percent fall in December 22 so I wanted to walk you through a worked example here to talk about what the real life impact of that is so if we assume a product that a Chinese company was selling for 100 US dollars equivalent we'll ignore exchange rates for the time being let's just talk about what's happening at the company level so if that product was selling the following year as we saw a 0.7 percent fall in producer prices they would have sold that product for $99.30 the following year prices went down by 2.7 percent so it would have come down to 96.62 a 2.3 percent fall in December 24 meant that the product would then be selling for 94.40 and the latest reduction of 1.9 percent over the last 12 months means that that same product that the Chinese company is producing would now be selling for $92.60 now when you look at this this doesn't look like a good business model because you'd always want to factor some sort of growth into your prices to cover any increase in your costs that's the way business works that's why most economies around the world have a target rate of inflation of maybe two or three percent because they want to give some headroom for companies to factor in increases in things like wages and rent and electricity costs all those sort of things but you can see that in China over the past four years there has been a compound price decline of 7.4 percent now let's have a look at what's been going on with costs over the same period so we've got the same four years here and you can see I've broadly put the costs into energy wages rent and then other factors to give us a total cost so if we assume that back in December of 2021 the total costs for this business were $80 so on average they were making $20 profit per item so that would be a 20 percent profit margin at that point if we then look at what's happened to the price of energy wages rent and other costs in China over the past four years you can see that in year in December 22 those costs would have increased to $86.63 in 23 they'd have been up to $90.99 in 24 they were up to $94.37 and in 25 there would have been up to $97.22 so if this company had maintained its sales price of $100 per unit you can see that in every single year its margin would have been coming down but unfortunately it didn't maintain its sales price at $100 it actually cut the prices because of the falling producer price index so if we now look at the overall impact back in December of 21 it was selling that product for $100 it had a total cost of $80 which meant a $20 profit 20% profit margin which is reasonable I think a lot of Chinese companies are not making 20% profit margins they're making far lower margins but let's assume for the for this example that 20% was a reasonable margin to achieve the following year because we had a fall in the sales price to $99.30 and an increase in costs to $86.63 the profit fell from $20 to $12.67 giving a profit margin of around about 12.8% in 23 we had a further fall in the price to $96.62 costs went up to $90.99 which meant that the profit was down to $5.63 profit margin of 5.8% so that's a significant reduction on the 20% that we had two years previous in 24 the selling price fell further to $94.90 costs went up to $94.37 which meant that the profit at that point was three cents per unit rather than $20 per unit three years previously which meant that the profit margin was basically zero and then in 2025 in this example the price would have fallen further the costs were up to $97.22 meaning a loss of $4.62 giving us a loss margin of 5% so the reason I wanted to show you this really it shows you the real life implication of continuing to cut your prices because costs don't come down costs are always going up we're always seeing demand for higher wages electricity prices always going up rent goes up so costs only go one way but unfortunately in China the prices have been going down and that's wiped out the profit margin for over 50% of Chinese businesses so I wanted to make this video really to put into perspective what's going on in China because they're continuing to make sales they're continuing to sell billions of products all around the world because they're cutting their prices to make sure that they're the most cost effective in the market and as a consumer that's great because you want to get the best deal you want to buy things at the lowest possible price so if the Chinese company's offering something that's 10% below everybody else a lot of people buy it so Chinese businesses are still recording a large volume of sales no question about that the export numbers are going up in terms of how much they're selling around the world and there's been an interesting shift because the tariffs that have been applied in the USA has meant a reduction year on year around about 7% in the USA for Chinese sales but China have flooded other markets like Europe and Africa with those same products at low prices so they're still shifting the product they're still getting it out of China and people are buying it but the problem is that they're buying it at much lower prices and the companies that are making these products are making them now for more than they're selling them so they're making losses and that is not a sustainable business model if this was in the capitalist world if this was a situation in the USA or the United Kingdom or Australia or Canada or anywhere then we would be seeing a massive wave of bankruptcies liquidations and companies going boss mass unemployment mass redundancies this would be one of the biggest depressions that we'd seen in living memory but because it's in China a lot of these companies are being sustained so they're taking on debt to fund their losses they're getting that debt from the state-owned enterprises or banks that are being told to offer that lending to all of these companies so everything is now being underpinned by debt in China so whilst the headlines might be reading that China's hit record export levels and the trade surplus is now at a record level that doesn't tell us the real story the real story is that profit margins have been wiped out in China lots of companies are now making losses they're living on debt they're being supported by the banks and at some point this merry-go-round has to stop you can't just carry on issuing more and more debt to keep these companies alive that's what China was doing with the property development companies and then at some point it said enough's enough it pulled the plug and a lot of those businesses have now gone bankrupt evergrande being probably the biggest example that's where I started talking about China so I always like to refer back to it's like a long lost son of mine I like to just keep an eye on what's going on with it unfortunately it's now gone into liquidation it's dead but it you know it's it's still worth mentioning because I think it's a good example that at the time evergrande was seen as being an amazing company it was a market leader it was hailed as being an incredible business model but actually that business model was flawed and it went bankrupt and I think we're seeing a similar situation in a lot of Chinese industries right now they're being undermined by all of these losses and at some point somebody's going to have to say enough's enough let's stop the lending and these companies will start to fall down and they'll go bankrupt and we could see major problems in the Chinese economy at the point that that happens so hopefully you've enjoyed today's video you found it useful informative and 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