Chinese Economy Coming Under ‘Greater Downward Pressure’ in 2019

Trade war is now taking its toll on China's domestic demand

Staff working in a factory that produces fiber optic cable in Nantong, in China's eastern Jiangsu province on Nov. 27, 2018 -/AFP/Getty Images

China’s manufacturing activity contracted for the first time in 19 months in December, as the world’s second-largest economy has suffered from weak domestic demand and trade frictions with the United States. Beijing needs to roll out immediate stimulus to prevent the continued weakening of the economy, say experts.

The Caixin Manufacturing Purchasing Managers’ index (PMI) missed market estimates, falling below 50, the mark that separates expansion from contraction. The gauge of nationwide manufacturing activity fell from 50.2 in November to 49.7 last month, the lowest level since May 2017.

Sluggish trade and domestic demand growth weighed on the Chinese manufacturing sector. And the most eye-catching news was the decline in new orders, which happened for the first time since June 2016.

The data released by the National Bureau of Statistics (NBS) on Dec. 31, also revealed a similar trend. The official manufacturing PMI unexpectedly fell to 49.4 in December, its lowest level in nearly three years.

The Caixin survey focuses on small and medium-sized private companies, while the official PMI measure tracks large companies and state-owned enterprises.

“In general, China’s manufacturing sector faced weakening domestic demand and subdued external demand in December,” wrote Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin.

“Companies had a stronger intention to destock and prices of industrial products were declining, which could further drag on production,” he added in the press release. “It is looking increasingly likely that the Chinese economy may come under greater downward pressure.”

Stock Market Woes Continue

Chinese stock markets tumbled after the announcement, with the benchmark Shanghai Composite Index down 1.15 percent and the Shenzhen Component Index closing 1.25 percent lower on Jan. 2.

China’s stock market woes may continue into 2019. Last year, China was the worst performing major stock market in the world, with both Shanghai and Shenzhen indexes falling more than 24 percent.

The trade war with Washington and the Chinese economic slowdown intensified investor worries resulting in a nearly $2.3 trillion loss in market value. Beijing’s deleveraging efforts in the financial system also played a huge role in the stock market crash, according to experts.

Weak economic growth prompted the Chinese regime to launch a series of stimulus measures since last summer. Chinese leaders pledged recently further tax cuts, infrastructure spending, and monetary loosening to boost the economy.

“We continue to expect more loosening measures to be announced by the government to support economic growth,” Goldman Sachs stated in a report.

Trade War Affects Domestic Demand

Recent economic data have indicated strong downward pressures. Industrial profits fell in November for the first time in nearly three years. Retail sales growth, a closely watched indicator of consumption, also weakened in November, recording the slowest pace in 15 years.

According to Iris Pang, greater China economist at ING, recent manufacturing data shows the economy is weak and that stimulus needs to arrive quickly.

“We believe that the data reflect that not only has the trade war damaged growth in the export sector. It has also hurt export-related supply chain companies and in turn, domestic demand,” she wrote in a note. “If domestic demand is not supported by fiscal stimulus quickly, then further weakening will pose a risk to job security. That could create a vicious downward cycle.”

In an effort to control sensitive economic data, the Chinese regime recently banned regional authorities from producing manufacturing activity data. The news came after the country’s export hub Guangdong province stopped releasing PMI data. Government officials said all future manufacturing activity data would be issued by the National Bureau of Statistics.

The move came as Beijing looked to control the dissemination of economic news amid a weakening economy and the trade conflict with the United States.