China shocks set in motion manufacturing ‘doom loop’
Factory activity is now entrenched in its longest slump in more than nine years as deflation takes hold
Deflation is coursing through the veins of China’s economy amid anemic domestic demand. Shrinking consumer spending, evaporating household wealth, stagnating wages and the property crisis have set in motion a manufacturing ‘doom loop.’
Last week, the official purchasing managers’ index, or PMI, again fell below the 50-point mark in October, separating expansion from contraction. Factory activity is now entrenched in its longest slump in more than nine years, the National Bureau of Statistics reported.
On Monday, a private survey that covers smaller and more export-oriented companies expanded “less than forecast” last month compared to September’s numbers. The RatingDog manufacturing PMI slipped to 50.6 from 51.2 as export orders tanked.
“Heightened trade uncertainty in October caused new export orders to fall sharply into contraction territory. On the production side, uncertainty in the external environment also dampened output growth,” Yao Yu, the founder at RatingDog, said in the statement.
Chinese overcapacity lies at the heart of the destruction.
George Magnus, Oxford University
Deal or no deal:
- The trade truce hammered out by American President Donald Trump and Chinese leader Xi Jinping in South Korea last week came too late to ease mounting concerns.
- Still, the slide runs much deeper and can be traced back to the collapse in consumer confidence, fueling a never-ending circle of deflation.
Delve deeper: George Magnus, the renowned economist and academic at Oxford University, pointed out that the “overcapacity problem” was driving this race to the bottom. “At home, Chinese overcapacity lies at the heart of the destruction,” he said in the summer.
Between the lines: “[It] is not a uniquely Chinese problem, but China is nevertheless in a league of its own. It is generic, rather than specific to [a few] industries,” Magnus, the author of Red Flags: Why Xi’s China is in Jeopardy, wrote in a commentary for The Guardian.
Big picture: For Chinese consumers, the aftershocks of the boom-and-bust era of the real estate market have taken a massive toll. Up to US$18 trillion of household wealth was destroyed by “the greatest property bubble in history.”
China Factor comment: So what comes next? Last month, Xi and the ruling Communist Party hinted at ways to get the Chinese people spending again in the latest five-year economic blueprint. But the plan was long on rhetoric and short on details.