Why falling prices – not stock market turmoil – is the real headache for China’s manufacturing bosses as the nation’s economy slows

The dramatic collapse of China’s stock markets has shaken global investors, but for Chinese factory executives the real problem is a decline of another kind - the remorseless erosion of profits thanks to nearly four years of price deflation.

While the stock market roller coaster of the past 12 months has hogged headlines, Chinese manufacturing has been stagnating slowly but inexorably for more than three years, with wholesale prices sliding continuously as legions of small companies compete desperately to stay above water.

Producer prices hit their lowest point since late 2009 in July.

“Business isn’t good, the economy isn’t doing well, so I’m not planning on expanding the business,” said You Zhenming, 39, whose factory, which sits amid fish farms outside the coastal city of Ninghai, makes small rubber components for cars.

Falling wholesale prices mean that the real cost of borrowing for companies remains high, despite a series of interest rate cuts, while shrinking profit margins discourage firms from investment that would generate growth.

Like many of the mid-sized private enterprises that form the backbone of China’s real economy, You’s factory is hurting, slammed by increased domestic competition, rising factor costs and falling exports, all of which mean less profits.