China’s Manufacturing Sector Declines in Fresh Sign of Economic Malaise
The country’s purchasing managers index dropped more than expected in July
China’s manufacturing activity declined for a fourth straight month in August, pointing to continued weakness in the world’s second-largest economy as a property-sector slump drags on.
The purchasing managers index dropped more than expected to 49.1 from 49.4 in July, according to data released Saturday by the National Bureau of Statistics. A reading below 50 suggests contraction, while one above indicates expansion.
The decline was in part driven by factors including recent high temperatures and heavy rains, as well as the offseason for some industries, according to the statistics bureau.
Saturday’s data came as no surprise for economists, given recent indicators signaling weak growth momentum and a lack of the type of major stimulus seen as necessary to jolt the economy.
A festering real-estate crisis, now in its third year, has yet to bottom out and remains a major headache for Beijing despite rounds of rescue efforts. Property investment has continued to plunge, while home sales showed no signs of improvement.
The gloomy property outlook prompted UBS economists to lower their forecasts for China’s economic growth this week. Economists at the bank now predict that gross domestic product will expand 4.6% and 4.0% this year and next year, respectively, down from previous projections of 4.9% and 4.6%. The downgrades reflect expectations that the property market weakness will exert a bigger drag on household consumption and the overall economy in the months to come.
The malaise in the economy is also evident in China’s fiscal data, which economists have viewed as a more reliable gauge of the Chinese economy as growth slows. Figures released this week showed a broad-based drop in tax revenue collection and suggested China’s underlying fundamentals could be more worrisome than the official growth figures implied, said Barclays’ economists in a note to clients this week.
In particular, the tax revenue on corporate income dropped 5.4% in the first seven months of the year. The fall was echoed in listed companies’ half-year results released this week that showed further deterioration in corporate margins, according to Barclays’ analysis.
“With weaker domestic demand exacerbating overcapacity issues, price wars or price cuts are becoming more widespread across industries, with many seeing comparable products and fierce competition,” said Barclays’ economists. “Falling profits will likely lead to pay cuts and layoffs, boding ill for consumption,” they added.
Signs of stress in the labor market already emerged in falling revenues from individual income tax. While such tax only covers only 13% of China’s labor force, its decline nonetheless suggests a worsening job market for the higher-income groups, Barclays’ economists said.
Some key indicators in the August PMI reading also signaled deterioration. The production subindex fell back to contraction in August, sliding to 49.8 in August from 50.1 in July, while that for total new orders dropped to 48.9 from 49.3. The gauge for employment edged down to 48.1 from July’s 48.3.
The subindex for new export orders stood at 48.7 in August, staying below the 50 threshold for four consecutive months, boding ill for a key growth driver that has helped offset sluggish domestic demand in the past several months. Amid rising trade disputes over the flood of cheap Chinese products to the global market, economists say rising protectionism elsewhere in the world threatens to weigh down exports.
The monthslong contraction in China’s vast manufacturing sector, combined with recent data showing subdued domestic demand and lingering disinflationary pressures, has prompted some economists to ask if Beijing is making a mistake by not rolling out bolder stimulus measures.
Chinese policymakers appear “paralyzed,” Yan Wang, chief emerging markets & China strategist at Montréal-based research firm Alpine Macro, said after a recent trip to China. They seem to lack a coherent strategy to address the country’s mounting economic challenges, he wrote in a note to clients this week. Even the piecemeal measures made so far are ad hoc and hesitant, Wang added.
“Essentially, Beijing is repeating the classic policy mistake Japan made after the asset bubbles burst in the early 1990s, risking the economy falling into a prolonged stagflation,” Wang said.
During that period, Japan gave priority to addressing structural issues to rebalance its economy instead of handing out more easing to iron out short-term economic swings, which economists say eventually lead to an extended recession.
To avoid a similar fate, Wang said Beijing should roll out bold stimulus measures to boost demand, alongside decisive debt-relief programs for local governments. Beijing also needs to show the world that China remains committed to market-oriented reforms in a credible way, he said.
China’s nonmanufacturing PMI, which covers both service and construction activity, edged up to 50.3 in August from 50.2 in July, the statistics bureau said.