China starts to spiral into an economic black hole
‘Significant challenges’ at home and abroad will force Beijing to rethink policy amid the gloom and doom
End of the month. Same old story. China’s manufacturers continue to feel the pain as the world’s second-largest economy spirals into a black hole.
At the weekend, the National Bureau of Statistics reported that factory activity plunged to a six-month low in August. Confidence evaporated as the official purchasing managers’ index or PMI fell to 49.1 from July’s figure of 49.4.
The numbers were below the 50-point mark, which separates growth from contraction, highlighting the “challenges” engulfing the world’s second-largest economy. A slight rise in a private survey failed to ease the gloom.
“Factories [experienced a] fourth month of contraction … [and] investment banks [have predicted] China will miss its annual target of 5% GDP growth,” Dexter Roberts, the author of The Myth of Chinese Capitalism, said.
“[Even] cash-strapped [local governments have] touted plans to ‘smash iron pots, sell the steel,’ [a metaphor for liquidating assets at all costs,] to pay down swelling debt,” he wrote in his Trade War newsletter at the weekend.
Behind the numbers:
- Local government debt is hovering around US$11 trillion after the real estate sector went from boom to bust.
- Only a green tech export rush has propped up an economy reeling from a property meltdown, stagnating wages, and anemic consumer spending.
- But even that has been hit after the United States and the European Union imposed eye-watering tariffs on heavily subsidized Chinese electric vehicles.
China’s economy is facing significant challenges.
Author Tao Wang
Big picture: “Considering the government’s ambitious annual economic growth target [of 5%], the challenges and difficulties over the coming months will be substantial,” Wang Zhe, an economist at Caixin Insight Group, said.
Delve deeper: The Caixin/S&P Global PMI edged higher to 50.4 in August from 49.8 in the previous month. But the outlook still looks increasingly unpredictable. The survey tends to cover small- and medium-sized export-oriented companies.
Between the lines: “China’s economy is facing significant challenges, with the external environment and [its] own economic fundamentals having changed,” Tao Wang, the author of Making Sense of China’s Economy, told the National Public Radio last month.
China Factor comment: Winter appears just around the corner for an economy in free fall, forcing Beijing to rethink its export-based policy.