Five things about China’s manufacturing and service indices

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Australian Economy, Chinese Economy, Uncategorized

Recent data coming from China’s manufacturing sector has indicated for a fall to contraction in July with the NBS’ manufacturing Purchasing Managers’ Index (PMI) dropping to 49.9 in July from 50 in June (wherein below 50-point mark is indicative of contraction). The decline was the first time since February and was mainly driven by low production and new orders. An official survey on service sector was upbeat on the other hand. The growth accelerated to 53.9 in July from 53.7 in June in terms of official services PMI. The sub-index for services rose to 52.6 from 52.2 of June. The Caixin China General Services PMI came in at 51.7 from 11-month high of 52.7 in June. This deceleration seems to be attributed to slowing new order growth and falling services employment. It has been reported that service companies are downsizing to cut cost but the overall employment decline was modest.

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Business Activity (Source: Financial Times)

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Possible reasons for the above mix of results include:

Falling volumes: China’s manufacturing index eased unexpectedly in July on account of fall in orders along with flooding that disrupted business. This collectively seems to create unrest with fears emanating with regard to economic impacts. There are speculations that economic growth would slow in coming months and government intervention might become a must step in terms of spending scenario. A similar private survey on the other hand showed business picking up for the first time in 17 months, however the increase is slight and the official survey suggested that China’s overall industrial activity remains sluggish.

Weak domestic demand: There seems to be persistently weak demand at domestic market which is forcing companies to shed jobs. Beijing also plans to shut more industrial overcapacity that could lead to many layoffs. The small and medium sized firms are impacting the scenario and economy may thus start to losing its momentum. Growth in China’s factory sector was seen to be stalled in the month of June post the expansion seen in three consecutive months from March to May.

Declining international demand: The sub-index measuring new orders dropped to 50.4 slowing down from June while the production sub-index decreased from 52.5 to 52.1. New export orders dropped 0.6 point to 49. Contraction in export orders was due to weak overseas demand and impact of Brexit.

Rising input costs: Input prices rose to 54.6 in July which impacted the scenario a little bit.

Slowing construction sector: In service segment, the construction sector services growth was improving but at a sluggish pace. A measure of construction industry sub-index stood at 61.1 from 62 in June. Financial services rose but the property sector services are weakening. Beijing showed a strong service sector growth as it is moving the economy from a dependence on heavy industry and manufacturing exports to service industry. Business activity in China service sector continued to expand in July as per private survey.

Given such weak outlook, several experts in the world have expressed their views on further steps that the Chinese government may consider. For instance, Nomura’s chief China economist Yang Zhao commented that even though the government has realized the downward pressure they should also realize that releasing stimulus to boost the economy continuously is not a the only best solution. The analyst advised that the government need to focus on reforms and deleveraging. On the other hand, other analysts argue that the Chinese economy has mostly steadied. Moreover, they believe that the activities are more reliant on growing government spending and debt. Many China watchers expect renewed weakness in coming months.

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