Bad Signs From China – Contract Manufacturing Activity
“In general, China’s manufacturing sector faced weakening domestic demand and subdued external demand in December. Companies had a stronger intention to destock and prices of industrial products were declining, which could further drag on production. It is looking increasingly likely that the Chinese economy may come under greater downward pressure.” said Zhengsheng Zhong in the Caixan report.
Trading sentiment for the first week of the new year was defined by the Chinese Purchase Manager Indices published in late December. Some key phrases have seen common use in almost every recent report on Chinese economic data: worse outlook, declining activity and weaker demand.
With all the trade tension between the world’s two biggest economies it’s not surprising to see increasingly worse news coming out and many of the recent economic reports do feel like they’re casualty reports from a frontline. The effects of the ongoing trade dispute between China and the US are clearly visible to anyone following stock indices, which have fallen more than 12 percent over the last month and a half. Even so, it’s common knowledge that markets tend to price in the future, not the present.
Going back to the Caixin PMI, the private survey asks 500 Chinese factories every month to measure the general sentiment of the manufacturing industry. The latest result shocked many analysts with its figures on business contracting activity in the last 19 months. The PMI fell to 49.7 in December, which is a clear sign of declining manufacturing activity. The 50 point line marks the difference between projecting an expanding or a regressive estimate. At this point the index clearly predicts that China’s decline will continue to decline.
The survey’s results highlight negative changes in the areas of new domestic orders and new export orders. Obviously if these companies receive less orders, then they themselves will place fewer orders for raw materials and other services. This could spell a potential overall decline in Asian markets where China’s the largest buyer. Furthermore some analysts have noted that owing to the effect of seasonality, the month of December typically boasts better results than January. The latter tends to produce lower numbers due to the Chinese New Year. The fact that manufacturing declined during what’s traditionally the best month of the year should give us an idea of what we can expect to see in the subsequent one: the rising possibility of an even sharper downturn.
After an eight to nine month delay we can finally start seeing the effects of trade tension showing up in the data. Previous orders have now been filled and new ones are The earlier orders have been fulfilled meanwhile the number of new ones has already started to dwindle. Governmental easing programs haven’t produced any visible improvements yet either and 2019 will be a difficult year for monetary tightening, since the unexpectedly poor PMI has forced analysts to reduce their GDP growth forecasts for the year. The current consensus shows an annual growth estimate of 6-6.3% whereas earlier projections were generally above 6.5%. While 6% is a robust growth rate in itself, it’s still 1% less than the 2017 figures.
It’s important to note that the Caixan report shows inventories increasing sharply in many parts of the industry. A larger stock would typically result in declining prices so as companies empty their inventories they’ll also drive prices downwards along the line, which means lower consumer parices and a less than 2% inflation rate in China.
Many US journalists have written about the mounting pressure on President Xi of China to resolve the trade dispute, however, it’s possible that said pressure may not actually be as high as it’s made out to be. China has opened a new front with the question of Taiwan that could easily become a major topic in the discourse of US-China relations. The arrest of Huawei’s manager and China’s detentions in response show that both parties involved are prepared to use unorthodox methods in the trade negotiation process. At this point it seems that the weaker PMI and slowing GDP growth won’t be enough to break China’s resistance just yet.