China Manufacturing PMI slumps, US tariffs not necessarily the culprit

China’s National Bureau of Statistics reported slowing growth pointing to weaker exports as the China Manufacturing Purchasing Managers Index (PMI) dropped to 50.8 percent, down 0.5 percentage points from the previous month to the second lowest reading in 12 months.

The PMI of large enterprises came in at 52.1 percent, unchanged from last month, whilst medium-sized enterprise PMI was 48.7 percent, 1.7 percentage points lower than the previous month and now in contraction. (>50 = expansion, <50 = contraction).

London based macroeconomic consultancy Capital Economics said in their report on the statistics release that: ‘In theory, 50 is the line that separates expansion from contraction, but in practice, the latest reading points toward a slowdown in annualized growth on the China Activity Proxy, our in-house alternative to GDP, to around 5%.’

Large enterprise PMI which includes industrial State-Owned Enterprises such as steel mills, power stations and heavy industry saw the commodity inventory components of the PMI drop to just 47.8 percent, down 0.9 percentage points indicating the start of widespread de-stocking of iron ore, coal and energy.

Further evidence can be seen in the input price index which rose 1.3 percentage points to 55.6 percent as oil prices rise and the value of the Yuan has fallen by 7 percent this year.

The service industry input price index was 54.3 percent, up 1.4 percentage points from the previous month. The construction industry input price index was 62.8 percent, up 0.7 percentage points from the previous month. The latter is volatile but does suggest that the recent surge in local government bond issuance may have helped to kick-start stagnant infrastructure spending said Capital Economics.

China Beige Book, a consultancy focused on ‘under the bonnet’ Chinese economics said last week that manufacturing ‘s multi-year rally has given way to declining revenue and sharply declining profit growth, and that an explosion in corporate borrowing is not being captured by official government statistics and domestic orders are not making up for the drop in exports.

It’s too soon to know if this is due to US tariffs or simply the result of cooling global growth. Capital Economics reported, adding: ‘Even if export growth did indeed weaken last month, this may not be due to US tariffs. Global growth is now cooling, which we think is weighing on foreign demand for Chinese goods irrespective of tariffs.