China Faces Flagging Growth

To most Americans China's economy is not front and center. It has been confirmed that China's factory sector unexpectedly shrank for the first time in nearly 2-1/2 years in January and we should not be surprised if more gloom lies ahead. This will raise expectations that policymakers will take more action to reverse this trend. The official Purchasing Managers' Index also known as the PMI, fell to 49.8 in January, China's National Bureau of Statistics said, this is just a freckle below the 50-point level that separates growth from contraction on a monthly basis. Slightly better results had been expected.

Several factors are currently negatively impacting growth in China, they include a housing slump, massive industrial overcapacity, erratic growth in exports, and a state-led slowdown in investment. China's economy has steadily lost steam in the last year with growth sinking to a twenty four year low of 7.4 percent. The downturn in manufacturing has also expanded into the country's fast growing services sector. The official non-manufacturing PMI slipped to 53.7, the lowest level since January 2014, from December's 54.1. The services sector has weathered the growth downturn better than factories, partly because it depends less on foreign demand. This sector made up about 48 percent of China's $10.2 trillion economy last year.

To revive demand, China's central bank unexpectedly cut interest rates in November after unveiling a stream of stimulus measures. Despite the steady policy support, both analysts and the IMF still expect economic growth to sag further this year to around 7 percent. In the January factory PMI, all but one of the sub-indices in the PMI fell from December, indicating entrenched weakness. Adding to the ugly report business expectations fell to 48.7 its lowest level on record. Even factory employment dropped to its lowest in nearly a year at 48.1, compared with the previous month's 47.9. New export orders, a proxy for the trade industry also fell, bottom-line little in the way of good news was evident.

In line with recent trends, the factory PMI showed smaller manufacturers which are often privately-owned were hit the hardest. A widely watched unofficial PMI by HSBC/Markit, which includes small factories, came in for January at 46.4, versus 50.3 for large manufacturers that are mostly government owned and run. All this underscores  the challenges facing China as factory profits grew at their weakest rate in two years during 2014. While China's industrial ministry said last week that it would aim to grow the manufacturing sector by 8 percent this year this is still a drop from last year's actual expansion of 8.3 percent.

The reason flagging growth is so important is that China still needs strong growth to add millions of new jobs, also a strong fear exist that China is be about to enter a rapid disinflation process. Some economists said the January reading was especially downbeat because it suggested that factories did not enjoy a usual spike in business before China's annual Spring Festival holiday that took place in mid-February this year. As to just how valid these figures are, it must be said, many people remain skeptical of the forecast and the numbers generated by China's internal government agencies.


Footnote; As always your comments are encouraged. Two other articles concerning China are listed below, also in the archives you will find several articles about this subject.
              http://brucewilds.blogspot.com/2014/12/china-housing-market-customs-tad-bizarre.html
              http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html