China’s Economy Shows New Signs of Weakness
Manufacturing contracted for a third straight month, and employment looks weaker, prompting calls for more aggressive government support
HONG KONG—Evidence of China’s flagging growth continues to roll in, raising questions about whether the government is doing enough to turn things around.
China’s manufacturing sector contracted for a third straight month in June and the nonmanufacturing sector weakened, with new orders falling for both, the country’s official statistics agency said Friday. Employment declined across both broad sectors, an indication that a nagging jobs shortage—particularly for young people—is worsening.
“The data will likely prompt officials to provide more easing to the economy,” said Louise Loo, a China economist at Oxford Economics who is based in Singapore. “The trade component of the economy has really deteriorated.”
China is facing a host of challenges that economists warn will threaten its long-term growth potential in the absence of drastic reforms. They include a mounting debt burden, stubbornly high youth unemployment, and a short-lived rebound in the beleaguered real-estate market.
Persistent political tensions have prompted more manufacturers to diversify their supply chains, a trend that will likely erode China’s role as the world’s factory floor.
Friday’s figures are the latest evidence that China’s economic recovery remains on shaky ground months after Beijing abandoned its draconian Covid-19 restrictions. Global demand for goods has cooled amid high inflation elsewhere in the world, while a domestic rebound driven by consumer spending is losing steam.
China’s official manufacturing purchasing managers index rose slightly to 49 in June from 48.8 in May, not enough to get over the 50 mark that separates expansion from contraction, the National Bureau of Statistics said. The result was largely in line with the 49.1 expected by economists surveyed by The Wall Street Journal.
A subindex on employment shrank to 48.2 in June, in contraction for a fourth straight month, highlighting the continuing stress in the labor market. The unemployment rate among workers aged 16 to 24 rose to a record of 20.8% in May, in part due to evaporating jobs in the manufacturing sector.
Despite policy makers’ efforts to maintain China’s lead in global trade by offering tax cuts for exporters and allowing its currency to depreciate, demand from overseas continues to drop. The new export orders component of June’s manufacturing PMI continued to decline to a five-month low of 46.4. The index for new orders overall remained in contraction at 48.6.
Meanwhile, activities in the services sector, a key driver of China’s postpandemic recovery, softened further in June to 52.8 from 53.8 in May, according to the statistics bureau.
That marks the lowest reading since last December, when Beijing abruptly scrapped Covid-related restrictions that had snarled internal travel and confined large swaths of urban dwellers at home from time to time over the past three years.
An index of nonmanufacturing sector employment came in at 46.8, registering a fourth straight month of contraction. The index for new orders, at 49.5, showed contraction for the second month in a row.
Another subindex tracking construction activities pulled back to 55.7 in June from 58.2 in May, a six-month low, as a short-lived rebound in housing activity continued to fizzle.
The weakness raises questions about the effectiveness of Beijing’s recent modest moves to cut interest rates, moves aimed at making it cheaper to borrow but which don’t address the demand-sapping stress experienced by many Chinese families.
Economists expect Beijing to remain reluctant to pump large amounts of credit into the economy, in part because demand for loans has been feeble as more households and companies shift to paying down debt instead of spending and making new investments.
China also has refrained so far from launching a big round of government spending, as it did to rescue the economy from the global financial crisis.
“Waning fiscal support weighed on construction activity,” wrote economists from Capital Economics in a note to clients on Friday, “and even services sector growth, a bright spot earlier this year, has now dropped below prepandemic levels.”
China is still largely expected to hit its annual growth target of around 5% despite the continuing weakness, reducing the urgency for Beijing to resort to big-ticket spending.
But economists warn that restraint may come at a cost.
“Unless concrete support is rolled out soon, the recent downturn in demand risks become self-reinforcing,” according to Capital Economics.