China’s PMI continues to signal manufacturing contraction. Combined with reduced exports, China’s economy is cornered.
China’s manufacturing sector has contracted for the fourth consecutive month as services activity has also declined. China is the second-largest economy in the world and a manufacturing behemoth.
Despite an initial quarter of better-than-expected GDP growth, China has constantly disappointed economists and investors. Most recently, China’s GDP growth for the second quarter was lower than expected at 6.3%.
China’s economy mostly relies on the manufacturing sector and its exports to the rest of the world. The health of the manufacturing sector is measured with the Purchasing Manager’s Index (PMI), which defines as "contraction" anything below 50 points.
Chinese PMI for July was 49.3, better than June but in contraction nevertheless. "Downward pressure on manufacturing eased slightly. But this was more than outweighed by a sharp deceleration in construction and cooling services activity," said Julian Evans-Pritchard at Capital Economics.
Following the release of data, the American and Asian stock markets rallied at Monday’s opening.
In July, China’s main real estate producer Evergrande declared an additional $81 billion in debt since 2021. Evergrande’s prolonged crisis continues to cause headaches for China’s central government.
Beijing needs to focus on growing internal demand, a major driver of manufacturing activity, which still has not rebounded to pre-Covid levels.
On Monday, China’s state council issued measures to restore demand in many key sectors including real estate and services. Covered in the usual Chinese government jargon, the measures have no concrete actions within an established timeframe. It will be up to local governments to implement these measures.
National officials said they will take advantage of the summer and other national holidays to create the right conditions for these measures.
Decline in trade
Another major factor in China’s plummeting manufacturing activity is the sharp decline in exports and trade. What good is manufacturing if China cannot export it?
June exports declined by a whopping 8.3% year-on-year, signaling China’s increasing isolationism.
Part of this decline is due to Germany’s recession and its weak economy. However, the biggest reason is increased rivalry with Western powers, particularly with the United States.
Washington has escalated the trade war against Beijing, which in turn has restricted exports of key metals used in electronic devices.
Both American and Chinese corporations are hurt by this trade war, though the balance seems currently in Washington’s favor. The Biden administration has restricted chip exports to China, hurting domestic firms like NVIDIA but widening the technological gap in its favor.
2023 will likely be a disaster for global economies, in the West and China alike.
