China Starts Raising Prices for the World
Chinese manufacturers are increasing prices, adding to inflation fears.
Chinese manufacturers are increasing prices, adding to inflation fears.
HONG KONG – Rising raw-materials costs and unrelenting supply-chain constraints are prompting many Chinese exporters to increase prices for the goods they sell abroad, raising fears it may add to global inflationary pressures.
The fears have deepened in recent days, after a grounded container ship blocked the Suez Canal, further straining global supply lines stretched by the coronavirus pandemic and stronger-than-expected demand for computer chips and other goods.
Rene de Jong, director of Resysta AV, an outdoor furniture manufacturer based in the southern Chinese city of Foshan, said he plans to raise prices by around 7% on new orders this summer.
That’s largely because prices of chemicals and metals that are used to produce cushions, foams and frames in the company’s factories in China and Indonesia have climbed rapidly in recent months. Shipping freight rates have also climbed roughly 90% since last June, though they are often paid by clients.
“In my nearly 25 years in China, I’ve never seen anything like this. I’ve never seen shipping costs like this before while steel and aluminium prices shot through the roof,” he said, adding that the company’s profit margins are under pressure.
Other Chinese exporters raising prices include apparel businesses and a toy wholesaler who told The Wall Street Journal his company has raised prices for new orders across the board by 10% to 15% since the beginning of March.
Price increases from Chinese factories alone aren’t necessarily enough to push inflation higher in the U.S. and elsewhere. Much of the sting could be absorbed if Western retailers choose to eat the cost increases themselves without passing them on to consumers, though doing so would squeeze retailers’ profit margins.
Also, official inflation calculations in the U.S. encompass far more than just the consumer goods people buy from abroad. Before the pandemic, more than 60% of consumer spending in the U.S. was on services like dining out or travelling, rather than on consumer goods.
Still, price increases by Chinese factories add yet another source of upward pressure on global prices at a time when the cost of everything from lumber to steel and cotton is higher. Some economists and investors worry that the trillions of dollars of stimulus unleashed worldwide will ultimately lead to more inflation than policy makers anticipate, especially if recent bottlenecks in global supply chains persist, though there are fierce debates over how bad the problem could become.
“There’s definitely a risk [that inflation will increase]. It’s not just the position of exporters. It’s everything, from the bottlenecks caused in global shipping to the idea that the stimulus might unleash more demand than supply can keep up with,” said Nick Marro, lead analyst for global trade at the Economist Intelligence Unit. Even so, “it’s somewhat premature to assume that we are going to see runaway inflation at this point.”
What’s clear is that Chinese manufacturers making products for the rest of the world are finding it increasingly hard to hold the line on costs, especially after the pandemic and lockdowns hurt their profits last year. In the past, Chinese factories with cheap labour were often a force for keeping global prices for everything from jeans to sofas lower, but that’s becoming less true as the factories’ own costs climb.
Shipping rates, which soared in recent months amid port bottlenecks and container shortages, are part of the problem. In some cases, clients ask Chinese suppliers to share the burden. In other cases, Chinese factories themselves are having to pay more to ship in imported raw materials, like lumber.
Meanwhile, prices for many commodities have stayed high or kept climbing, and some businesses are choosing to pass those costs on to customers.
Prices for imports from China to the U.S. rose 1.2% over the past year, the fastest increase since 2012, with most of the increase coming in the three months ending in February, according to data from the U.S. Bureau of Labor Statistics.
One positive for American consumers is that the U.S. dollar has remained stronger than many economists expected, which gives its shoppers more buying power when paying for imported goods. Many families accumulated savings during the pandemic, making it easier for them to pay a little more.
Prices are moving higher “primarily on stronger demand,” said Robin Xing, chief China economist at Morgan Stanley. “Manufacturers will find ways to pass on costs in this circumstance. This will not derail the global recovery.”
Some Chinese manufacturers, meanwhile, have said they have been reluctant to increase prices for fear of losing market share, and expect raw materials costs to cool off.
However, there is little sign at the moment that the forces pushing costs higher in China will ease soon.
Ni Fang, manager of Ji’an Huaerxin Shoes Co., a producer of work boots in Jiangxi province that mostly sells to Europe and Southeast Asia, said that after China’s Lunar New Year in February, the company started receiving notices from suppliers of price increases ranging from 10% to 30% for raw materials used in boots and their packaging, including polyurethane, steel and paper.
The factory responded in late February by raising most product prices by around 5%.
“This round of spike in raw materials costs pushed us close to the point where we couldn’t bear it anymore,” said Ms. Ni, adding that the factory still absorbs parts of the cost increase for fear of turning away too many clients.
Other factors may be contributing to higher costs in China. Authorities are trying to limit fossil-fuel consumption to help China achieve its goal of reducing carbon emissions, which may be making it harder for steel and other sectors to increase production. Chinese officials in January reiterated their goal of ensuring that crude steel output will decline year-over-year in 2021, even as steel demand is projected to increase this year as the economy recovers.
Factory owners and economists say they also suspect some buyers are hoarding commodities, adding price pressure.
Chen Yang, a trader at a state-owned textile company in Jiangsu province, said some upstream suppliers began hoarding cotton before the Lunar New Year, telling him they expected the latest $1.9 trillion stimulus bill from the U.S. would buoy commodities prices across the board. Cotton prices jumped to around $2,600 a ton in early March, compared with around $1,990 a ton in mid-February, according to Mr Chen.
As a result, his company had to increase product prices accordingly, since raw materials account for about 70% to 80% of total costs.
“I got calls from clients almost every day asking about the prices, but very few actually placed orders,” he said. “They all want to wait for the prices to cool off. But they’ll have to order sooner or later.”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 29, 2021
BNW Developments has established a Sydney presence, joining Arada and Sobha Realty among the growing number of UAE developers pursuing Australian buyers and development opportunities.
The Australian leather house has opened an immersive four-day pop-up in Manhattan, unveiling its Bloom Collection and redefining what a product launch can look like.
Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.