Bad News Piles Up for China's Economyby
Bad tidings for manufacturing and services, and weakening consumer confidence: China sure packed a lot of disappointing economic news into just a few days. And it’s certain to strengthen recent calls in China for renewed stimulus measures, including through rapid approvals of new infrastructure projects and more credit easing.
First came the release of China’s dueling manufacturing indexes on June 1, “now among the world’s most-closely watched pieces of economic data,” according to London-based Capital Economics economists Qinwei Wang and Mark Williams in a May 31 note. “Manufacturing weakening more than initially thought” and “further disappointment,” concluded Capital Economics, after the data were announced.
While the official manufacturing purchasing managers’ index, published by China’s National Bureau of Statistics and its logistics federation, showed a slight expansion, it was still a dramatic drop from the previous month. The survey of 820 companies came in with a reading of 50.4, compared with 53.3 in April, “much lower than anticipated,” wrote Wang and Williams. (A reading above 50 shows a growing sector; below 50, a manufacturing contraction.)
Alternately, the HSBC Holdings /Markit Economics reading based on responses from about 430 companies (which is seen as more accurate than the official one as it has less seasonal distortion and is more appropriately weighted toward smaller companies) came in at 48.4, down from April’s 49.3, showing a seventh consecutive month of contraction in manufacturing. And with a fall in export orders smaller than that in domestic ones, “most of the recent weakness has been in domestic rather than foreign demand,” wrote Wang and Williams. Still, they “expect the PMIs to pick up as stimulus starts to take effect,” the Capital Economics economists noted.
Manufacturing is showing “clear signs of weak economic growth momentum,” wrote China International Capital Corp. in a June 1 note. “The National Development and Reform Commission has recently expedited project approvals but whether this can effectively stabilize investment and GDP growth still depends on monetary and credit policies,” the bank continued, forecasting more reductions in bank reserve requirements and a cut in benchmark lending rates “in the near term.”
As if the dismal state of manufacturing wasn’t depressing enough, on June 3 came bad numbers showing trouble in China’s service sector, with the release of the nonmanufacturing index, also compiled by China’s statistics bureau and logistics federation (HSBC and Markit will release their service industries survey June 5.) Covering about 1,200 companies in 27 industries, including telecoms, transportation, and construction, it fell to 55.2 in May from 56.1 in April, showing the slowest growth in China’s service sector in more than a year.
“The data reinforce the message that the slowdown has spread from the manufacturing sector to the services sector,” Tim Condon, chief Asia economist at ING Financial Markets in Singapore, said in an interview with Bloomberg News. “The current slowdown is more complicated to read than the 2008 global financial crisis and is stressing the authorities’ vaunted fine-tuning skills.” Service industries now account for 43 percent of China’s economy, according to the logistics federation, with China aiming to grow that to 47 percent by 2015.
To round out the distressing data, on June 4 a survey of Chinese consumer sentiment showed weakening confidence, registering its lowest level since December. “Consumers reacted badly to unexpectedly weak April economic data, as the global growth slowdown caught up with the Chinese economy,” said a release by Market News International, a subsidiary of Frankfurt-based market data and analytics company Deutsche Borse Group.
The reading of 90.4 in May compares with 94.2 the previous month (anything below 100 shows more pessimism than optimism). The survey measures consumer confidence toward personal finances, willingness to buy major household items, and perceptions about business conditions going forward—all of which weakened in May. While sentiment about the real estate market fell for a fourth month, willingness to buy a car fell to its lowest level in the five years since the index was launched.
The survey also showed falling confidence across the country, but with particular pessimism in China’s central and western regions. And while all age groups registered new nervousness, that was particularly pronounced in China’s middle-aged and elderly populations.
Still, focusing on the fears of the Chinese people is not the key to predicting the fate of the Chinese economy, argues Patrick Chovanec, a business professor at Tsinghua University in Beijing. “When I think about a hard landing, I’m not thinking about the Chinese consumer stopping buying. Someone can be optimistic, but it doesn’t really matter, they can’t drive the economy,” says Chovanec, pointing out that household consumption still only amounts to under 35 percent of the economy, as compared with close to 50 percent for investment.
“Much more significant is looking at inventories of metals and raw materials to read where the economy is going,” he says, adding that steel, aluminum, and copper are all in alarming overcapacity. “The most volatile element is whether the investment boom will continue or not.”