China’s economy hits a row of speed bumps

Official numbers put the brake on recovery as raw material prices, environmental curbs and power shortages bite

China’s economy once purred like a Ferrari. Now, its wheezing is reminiscent of a second-hand Mini. In ideal conditions, it still has the oomph to zip along. But in a tough environment, its engine is prone to splutter.

Latest factory activity in the world’s second-largest economy illustrated the potholed-strewn road that lies ahead. 

The official Purchasing Manager’s Index for manufacturing, or PMI, hit numerous speed bumps after contracting again in October.

Soaring raw material prices, environmental curbs and power shortages have played havoc with China’s economy. But that is only part of the problem.

“A paradigm shift has taken place in how Beijing approaches its economic priorities and management. Many China watchers have missed it because they are relying on a series of misperceptions and flawed forecasts based on China’s old-growth playbook,” Leland Miller, the co-founder and CEO of China Beige Book, and Shehzad Qazi, the research company’s managing director, wrote in a commentary for Barron’s.

The numbers:

  • China’s official manufacturing PMI dropped to 49.2 last month from 49.6 in September, the National Bureau of Statistics reported at the weekend.
  • The 50-point mark separates growth from contraction.
  • A productivity subindex slipped even further to 48.4 in October compared to 49.5 in the previous month.
  • Services also suffered a hit with the official non-manufacturing PMI easing to 52.4 from 53.2 in September.
  • The numbers suffered from a rise in localized Covid-19 outbreaks, bad weather and a power crisis.
  • In fact, the only positive news came from the private Caixin/Markit manufacturing PMI, released on Monday.
  • It jumped to 50.6 in October, which was the highest level since June.
Official Manufacturing PMI
Chart: China’s National Bureau of Statistics

Behind the figures: “At the onset of China’s mid-2020 Covid reopening there was little disagreement that the country’s recovery was overwhelmingly driven by industry, with the retail and services sectors lagging. Predictions were rife that consumer spending would catch up in 2021 as the recovery normalized,” Miller and Qazi pointed out in an article for Barron’s, which is part of the Dow Jones group.

Phantom boom: “That was never in the cards. Data from China Beige Book, based on surveys of over 4,000 Chinese corporates each quarter, revealed that a consumer spending boom was never imminent,” they said.

China’s take: “About one-third of the companies surveyed listed insufficient demand as their biggest difficulty, [which has] restricted production,” Zhang Liqun, an analyst at the China Logistics Information Center, said as reported by the Reuters news agency.

Tale of two surveys: The official PMI tends to be comprised of selected state-owned enterprises and large conglomerates. In comparison, the Caixin/Markit survey is built around small- and medium-sized private companies in export-oriented coastal regions such as the high-tech metropolis of Shenzhen.

Mixed signals: “To sum up, manufacturing recovered slightly in October from the previous month. But downward pressure on economic growth continued,” Wang Zhe, a senior economist at the Caixin Insight Group, said.

China Factor comment: China’s economy is undergoing a massive change. High-end manufacturing has become a priority along with boosting consumer demand in a policy shift known as “Dual Circulation.” But unforeseen obstacles, such as a tangled global supply chain and domestic headaches, are posing major challenges.