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Chinese Factories Cut Prices, Lay Off Workers in Trade War

Dec. 17, 2018
Some 86% of companies affected by U.S. tariffs reported a decline in orders.

Chinese factories are responding to threats of a trade war by reducing prices, workers and investment, according to UBS Group AG.

Some 86% of companies affected by U.S. tariffs reported a decline in orders, according to a survey of 200 chief financial officers in manufacturing firms with significant export business. While most have plans to diversify into less trade-heavy sectors, they don’t expect to fully offset weaker demand. Of the 125 companies saying business has already been hurt:

  • 68% cut prices on products subject to levies
  • 23% laid off staff
  • 27% slashed capital expenditures
  • 18% cut wages

A squeeze on corporate margins and employment threatens to deepen a slowdown in the world’s second-largest economy. UBS predicts a 90-day truce agreed between U.S. President Donald Trump and China’s leader Xi Jinping is only a temporary respite, putting the probability of a lasting agreement before March at less than 15 percent.

“Most companies expect the trade war to escalate,” analysts led by Wang Tao wrote, predicting that export growth will slow to 4% in 2019 from 11% this year. With that will come more price cuts and more layoffs in the next six months, according to the report.

The Chinese government has rolled out measures including tax breaks and subsidies to cushion the impact of tariffs on exporters, a strategy UBS expects will continue in 2019.

“We see the government easing macro policies to support growth, and provide some subsidies and tax cuts to support employment,” the analysts wrote.

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