China’s economy is facing an array of challenges

Major manufacturers see a surge in raw material costs and a strengthening yuan

Dark clouds loom on the horizon of China’s powerful economy.

Rising raw material costs, slowing manufacturing growth and a surge in Covid-19 cases in the country’s “biggest” trading “partner” are acting as a brake on factory activity.

A semiconductor shortage has only added to an increasingly gloomy picture.

On Monday, data showed that the official manufacturing Purchasing Managers’ Index inched lower at 51.0 in May compared to the previous month. But it was still above the 50-point mark that separates expansion from contraction.

“[Still,] the employee index fell nearly 1% to 48.9 in May, [highlighting] a reduction of employment in [major] manufacturing enterprises,” the National Bureau of Statistics stated as reported by the state-run Global Times.

The facts 

  • The official PMI tends to deal with large companies and the entire state-owned enterprise network.
  • But a sub-index for small firms came in at 48.8 in May, sharply down from last month’s 50.8, and in negative territory.
  • Against that, activity in the services sector expanded for the 15th straight month.
  • The non-manufacturing PMI index rose to 55.2 from 54.9 in April.
  • Even so, the data was released amid concerns about the strength of the yuan against the dollar. 
  • The rapid appreciation of China’s currency could push up the price of products manufactured in the world’s second-largest economy.

Reaction to the news: Iris Pang, the chief economist for Greater China at multinational banking group ING, warned that “external demand will likely remain flat.”

Trading places: As economies bounce back from the pandemic in the United States and parts of Europe, that will be “offset by increasing coronavirus cases in ASEAN, which is the biggest trade partner of China,” Pang said in a note.

Warning signs: “The foundations for the domestic economic recovery are not yet secure,” Fu Linghui, a spokesman for the National Bureau of Statistics, told a media briefing earlier this month.

Raw deal: “We expect commodity prices to stabilize in the coming months,” Louis Kuijs, the head of Asia economics at Oxford Economics, said as reported by the Reuters news agency.

Delve deeper: Rising unemployment continues to be a flashing red light for the ruling Communist Party. 

Jobless fears: “We must continue to give priority to employment,” Premier Li Keqiang told a meeting of the powerful State Council earlier this month.

China Factor comment: The People’s Bank of China is keeping a close eye on the strengthening yuan, which could damage exports and hit domestic consumers. But while the central bank has policy tools to tackle the problem, curbing surging raw material costs and a global semiconductor shortage will pose more serious problems.