China’s Manufacturing Activity Shrinks for 5th Straight Month

A worker welding metal at a factory in Hangzhou in China's Zhejiang Province on July 15, 2023. STR/AFP via Getty Images

Chinese manufacturing activity shrank for the fifth consecutive month in August, as the services sector slumped to its lowest level this year.

The National Bureau of Statistics‘ manufacturing purchasing managers’ index (PMI) edged up to 49.7 in August, from 49.3 in July—anything below 50 indicates contraction. While that topped the consensus estimate of 49.4, the monthly reading has been stuck in contraction territory for eight of the past 12 months. New orders and buying activity rebounded, expanding for the first time since March. But export sales tumbled for the fifth straight month.

The official non-manufacturing PMI slipped to 51.0, from 51.5 in July. The print came in slightly below market estimates of 51.1.

Despite recent indicators highlighting deflation, the manufacturing and services PMIs hinted at reviving inflationary pressures due to rising input costs that usually lead to increasing output prices.

“The survey results show that insufficient market demand is still the main problem that enterprises are facing, and the foundation for the recovery and development of the manufacturing industry needs to be further consolidated,” Zhao Qinghe, a senior National Bureau of Statistics official, said in a statement.

The private-sector version of the manufacturing PMI from Caixin will be released on Aug. 31; that’s also expected to be in contraction territory.

Markets were mixed on the news. The Hang Seng Index rose by 0.5 percent, while the Shanghai Composite Index slipped by about 0.2 percent.

The latest manufacturing and non-manufacturing PMIs point to an economy that is neither growing nor shrinking, according to ING economists.

“The forward-looking elements of the service sector PMI index remain in contraction territory, unlike their manufacturing counterparts, and that suggests that the headline index has probably not yet troughed and will fall further. A glimmer of hope may be in the export series, which, while clearly continuing to signal contraction, did fractionally rise this month,” they wrote in a note.

“Overall, though, both series seem to be converging on a point close to 50 consistent with an economy that is neither expanding nor contracting. Things could be worse. But markets are not likely to take too much comfort from this set of data.”

Slowing Economy

In recent months, data have confirmed that the Chinese economy is experiencing a slowdown despite hopes that post-pandemic conditions would lead to an exceptional boom. Instead, the world’s second-largest economy has seen retail sales easing, rising unemployment, cratering exports, and a falling Chinese yuan.

The collapse of Evergrande Group and Country Garden, the two largest property developers in the nation, added to the country’s economic woes.

A resident wears a mask while cycling through Evergrande City in Wuhan, Hubei Province, China, on Sept. 24, 2021. Getty Images

Because of sluggish growth, officials have started employing fiscal and monetary stimulus measures to bolster the economic landscape.

In August, the People’s Bank of China (PBOC) trimmed the 1-year Medium-Term Lending Facility (MLF)—a funding mechanism to enable the institution to inject liquidity into the financial system and set rates for various loans—by 15 basis points to 2.5 percent. The central bank later cut the key 1-year loan prime rate (LPR)—a benchmark interest rate for most household and business loans—by 10 basis points to an all-time low of 3.45 percent. It kept the 5-year LPR, a reference point for mortgages, unchanged at 4.2 percent.

This past spring, the PBOC slashed the reserve requirement ratio, or RRR, by 25 basis points. The policy decision was applicable to all banks except companies that have installed a 5 percent reserve ratio.

Officials are attempting to expand credit to consumers and businesses by encouraging banks to lend more. Ma Jianyang, the deputy head of the financial market department, reportedly plans to make the case to financial regulators, large companies, and lenders that banks need to expand loans to businesses that are borrowing for the first time and establish annual targets for services to private entities.

In July, Chinese banks extended $47.5 billion in new loans, the lowest amount since November 2009. Household and business loans tumbled in July. Moreover, outstanding loans climbed by more than 11 percent in July, the smallest percentage so far this year.

The Chinese offshore yuan is poised to hit a record low this year. The offshore yuan, which is mainly used by businesses and investors outside of mainland China, could plunge to 7.6 against the U.S. dollar by the year’s end. It’s already down by more than 5 percent year-to-date against the greenback.

As of Aug. 31, the USD/CNH currency pair was trading at about 7.3.

A man walks past the headquarters of the People's Bank of China, the central bank, in Beijing on Sept. 28, 2018. Jason Lee/Reuters

Officials have intervened in currency markets to support the yuan. In August, authorities confirmed they would allow the yuan to trade at a 2 percent band relative to the daily fixing each day.

A recent PBOC paper suggests that policymakers possess other tools to stabilize the foreign exchange market, such as using the forex deposit-reserve ratio, forex-reserves ratio, and macroprudential factors for cross-border financing.

But it is not only the broader economy that is struggling. The financial markets are slumping too.

Year-to-date, the Hang Seng Index has declined by about 6 percent. It has also fallen by about 25 percent since January 2021. The Shanghai Composite Index is up by just 1 percent so far this year and has dropped 10 percent since December 2022.

For the first time since April 2008, the Chinese regime reduced the tax on stock trading from 0.1 percent to 0.05 percent. The Ministry of Finance and the State Administration of Taxation said in a joint statement that the goal behind the tax cut was to revive capital markets and lift investor confidence.

In a separate Aug. 27 announcement, the China Securities Regulatory Commission outlined several measures to improve investor confidence. The nation’s chief stock market watchdog aims to slow the pace of initial public offerings, decrease the amount of collateral that traders must hold with their brokers, and implement restrictions on how much major stockholders in publicly traded companies can sell their shares on the stock market.

World Waits

From economists to traders, the world is waiting to see what the Chinese regime will do to stimulate the anemic economy. But while analysts will wait for fresh data in the coming months to determine whether the government’s efforts are resulting in gains, many experts believe that Beijing needs to fire off a bazooka-like stimulus to support the economy. Whether officials have enough tools at their disposal or not remains to be seen.