Bitcoin’s price on Bitmex plummeted to $8,900 in a flash crash late Monday, diverging significantly from the global average price of around $67,400, due to large sell orders on the XBT/USDT pair. Bitmex is investigating the incident, which involved over 850 BTC being sold, causing the dramatic price drop while other exchanges showed prices well […]
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By Ellen Zhang and Marius Zaharia
BEIJING/HONG KONG (Reuters) – When Kris Lin, who owns a lighting factory in China, received this year’s first order from a close overseas client, he faced a distressing choice: take it at a loss, or tell workers not to come back after the Lunar New Year.
“It was impossible for me to lose this order,” said Lin, who plans to re-start his factory in the eastern city of Taizhou at around half its capacity after the Feb. 10-17 holiday break.
“I could have lost this client forever, and it would have endangered livelihoods for so many people. If we delay resuming production, people might start doubting our business. If rumours spread, it affects the decisions of our suppliers.”
Prolonged factory deflation is threatening the survival of smaller Chinese exporters who are locked in relentless price wars for shrinking business as higher interest rates abroad and rising trade protectionism squeeze demand.
Producer prices have been falling for 15 straight months, crushing profit margins to the point where industrial output and jobs are now at risk and compounding China’s economic woes, which include a property crisis and debt crunch.
About 180 million people work in export-related jobs, commerce ministry data from 2022 shows.
Raymond Yeung, chief China economist at ANZ, says fixing deflation should be a higher policy priority than reaching the expected growth target of around 5% for this year.
“Companies cut product prices, then staff salaries. Then consumers won’t buy – this could be a vicious cycle,” he said.
Profits at China’s industrial firms fell 2.3% last year, adding to the 4% drop in COVID-hit 2022. An official survey showed manufacturing activity contracting for a fourth straight month in January, while export orders shrank for a 10th month.
For Lin, that has meant the $1.5 million order his client placed was 25% below a similar one last year. It was 10% below production cost.
Sluggish exports mean policymakers need to pull other levers to reach their growth target, increasing the urgency of stimulating household consumption, analysts say.
“The more ‘rebalanced’ growth is, the faster that downward pressure on prices and margins will dissipate,” said Louis Kuijs, Asia-Pacific chief economist at S&P Global.
‘RAT RACE’
China has been funnelling financial resources into the manufacturing sector, rather than consumers, exacerbating overcapacity and deflation concerns, even in booming higher-end sectors, such as electric vehicles.
An executive at an automotive moulds factory from the eastern Zhejiang province, who asked not to be named due to the sensitivity of the matter, expects the firm’s output and exports to rise, but earnings to fall, describing the intensifying competition in the industry as a “rat race.”
As China’s central bank unleashes liquidity into the financial system to spur growth, banks are chasing factories with cheap loan offers.
But squeezed out by bigger rivals, smaller firms are unwilling to take on loans to finance new business, in what economists see as a broken link in China’s increasingly inefficient monetary policy.
Investment by private companies, which according to state officials provide 80% of urban jobs, dropped 0.4% last year, while state investment rose 6.4%.
“Many bank managers call me and they sound very anxious when they can’t lend money,” said Miao Yujie, an e-commerce clothing exporter.
Even after halving his workforce to about 20 people last year, he cannot turn a profit as bigger firms elbow him out of the market.
“But you only need to borrow when you want to expand,” said Miao, adding he mulls closing his business.
THIS TIME IS DIFFERENT
China also went through a deflationary scare in 2015, when it faced overcapacity in primary industries, such as steel, dominated by state-owned enterprises. Authorities downsized these companies to reduce supply and accelerated infrastructure and property construction to boost demand.
“This time it’s more of a private sector surplus,” said Hwabao Trust economist Nie Wen, singling out electronics, chemicals and machinery makers. These firms employ large numbers of people, a sensitive spot for China’s policymakers.
“It is therefore difficult to shrink supply, so more effort should be made on the demand side this year,” Nie said.
Factory owners say the pressure to cut jobs is intense, even if some are reluctant to do so.
Yang Bingben, whose company makes industrial-use valves in the eastern city of Wenzhou, said he had thought of shutting down the business, but keeps it running as he feels indebted to his workers, most of whom are close to retirement age.
Still, he doesn’t know how long the factory can survive.
“This year will be the best of the next decade,” Yang said.
(Additional reporting by Qiaoyi Li; Graphic by Kripa Jayaram; Editing by Sam Holmes)
Baidu on Monday said it had no links to a Chinese military lab, after a report sent stock in the internet services company tumbling.
Baidu shares
9888,
in Hong Kong slumped 12% after the South China Morning Post reported on a research laboratory with the People’s Liberation Army’s Strategic Support Force that had tested its AI system on Baidu’s Ernie, as well as iFlyTrek’s Spark, which are large language models akin to OpenAI’s ChatGPT.
U.S. shares of Baidu
BIDU,
were not trading on Monday, as U.S. stock markets are shut in observance of the Martin Luther King Jr. holiday.
“The academic paper, published by scholars at a Chinese university, described how the authors built prompts and received responses from LLMs, using the functions available to any user interacting with generative AI tools. Baidu has not engaged in any business collaboration or provided any tailored service to authors of the academic paper or any institutions with which they are affiliated,” said the statement from Baidu, which also noted that The South China Morning Post corrected its initial report.
The correction states that the PLA lab tested its system on the Baidu model, but corrected its initial reporting that there was a physical link between its AI system and Baidu’s Ernie.
The newspaper reported that the academic paper said the AI simulated the U.S. invasion of Libya in 2011, and successfully predicted the next move of the U.S. military.
Shares of Okta (OKTA -8.14%), the identity-focused cybersecurity specialist, were falling for the second session in a row Monday, following Friday afternoon’s news of a security breach.
Today, the stock fell further as Wall Street analysts shared largely bearish commentary in the wake of the incident.
As of 11:35 a.m. ET, the stock was down 7.1% after falling 11.6% in Friday’s session.
Image source: Getty Images.
Shares fell on Friday after the Krebs on Security blog initially reported that hackers had stolen access tokens from Okta’s customer support unit in an incident that affected a “very small number” of customers.
In its own blog post, the cloud identity company said it had identified adversarial activity that used a stolen credential to access Okta’s support case management system. It also said that all customers who were impacted had been notified.
Today, several analysts responded negatively to the incident. Citigroup added Okta to its “negative catalyst watch,” saying that even if the breach is contained, the negative impact on sentiment after multiple security breaches is concerning. It also said reputational risk could affect new customer growth.
Similarly, Evercore ISI put Okta on its tactical underperform list, calling the security incident Okta’s second major breach in about two years, and said it could impact customer confidence in Okta.
BTIG, however, said that investors overreacted to the news as the breach didn’t impact Okta’s products or services. The firm maintained a buy rating and a $98 price target.
There have now been multiple reported security breaches against Okta, the best known of which was the Lapsus$ attack early last year. That incident did not have a sustained impact on Okta’s business so it seems unlikely that this one, which is a smaller breach, will either. However, there is a reputational risk from the publicity of these breaches, and it’s harder to discern its impact.
Okta stock has now fallen close to 20% over the last two sessions, essentially giving back the gains it made after surging on its most recent earnings report.
The stock now trades at a price-to-sales ratio of 6, which is cheap compared to its historical valuation, but shares are likely to be in the penalty box until the company can reassure investors.
Long-term investors could use the sell-off as a buying opportunity, but Okta stock is likely to be volatile as cloud software demand is still shaking out and as the company’s push to expand its profit margin is ongoing.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Okta. The Motley Fool has positions in and recommends Okta. The Motley Fool has a disclosure policy.