Consumer crisis threatens to derail China’s economy

China faces a consumer crisis and a broader economic slowdown amid Covid-19 restrictions and price hikes.

Last month, factory activity expanded at the slowest pace for nearly 18 months as supply problems increased and raw material costs soared.

With unemployment starting to rise, consumer confidence also took a hit.

“The latest Covid-19 resurgence has posed a severe challenge to the economic normalization that began in the second quarter of last year,” Wang Zhe, a senior economist at the Caixin Insight Group, said on Wednesday. 

“Authorities need to take a holistic view and balance containing [the virus with] stabilizing the job market and prices,” Wang pointed out after the release of the Caixin/Markit Manufacturing Purchasing Managers’ Index or PMI.

The numbers:

• Caixin’s private manufacturing PMI fell to 49.2 in August from 50.3 in the previous month.
• The 50-point mark separates growth from contraction.
• New export orders tumbled for the first time since February.
• Factories also laid off more workers than they hired amid a global semiconductor or chip crisis.
• A sub-index for production fell to 47.7.
• That was the slowest pace of expansion since February last year at the height of the pandemic.
• Another sub-index for new orders slipped to 48.0.
• Earlier this week, the official manufacturing PMI released by the National Bureau of Statistics came in at 50.1 for August.
• A sub-index for manufacturing jobs was unchanged at 49.6, signaling a contraction.
• But non-manufacturing employment fell to 47.0, hammered by a struggling service sector.

Non-manufacturing PMI Index | Seasonally adjusted

What was said: “The latest surveys suggest that China’s economy contracted [in August] as virus disruptions weighed heavily on services activity. Industry also continued to come off the boil as supply chain bottlenecks worsened and demand softened,” Julian Evans-Pritchard, a senior China economist at Capital Economics, said in a note.

Official view: “This [Covid-19] epidemic in multiple provinces and locations was a fairly big shock to the service industry, which is still in recovery,” Zhao Qinghe, of the National Bureau of Statistics, stressed.

Big picture: There are real concerns about the veracity of government figures. The National Bureau of Statistics has become addicted to sugar-coated stats when it comes to the world’s second-largest economy. The real numbers could be even more shocking.

Delve deeper: Unemployment amongst the young continues to rise. There is also apprehension about the “hidden” jobless “problem” known as the “underemployed.” 

Missing millions: Plus, there are zero figures for the migrant workforce, which is the backbone of e-commerce, construction, manufacturing and key service sectors.

Statistical sham: In an April report released by the London-based Fathom Consulting, economists stated that China’s figure for the unemployed and underemployed was around 17%. Seven years ago, it was roughly 5%.

Major issue: The powerful State Council has already made tackling unemployment a major issue.“Demographics are not on China’s side here. Labor market challenges will only worsen,” Trivium China, the research group, warned.

China Factor comment: As we said in July, “China’s numbers look enticing compared to other major economies. But dig deeper and cracks appear.” The only change is that the cracks are widening.