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China manufacturing slows in September as trade war worsens
[BEIJING] Two gauges of activity in China's manufacturing sector worsened in September, reflecting the nation's economic slowdown and fallout from the trade war with the US.
The official manufacturing purchasing managers index stood at 50.8 in September versus 51.3 in August, lower than the median estimate of 51.2 in a Bloomberg survey of economists. Meanwhile, the Caixin manufacturing PMI, which better reflects sentiment among smaller, private firms, declined to 50 from 50.6, the lowest since May 2017. A reading of 50 is the dividing line between expansion and contraction.
The lack of progress in negotiations between Washington and Beijing over their trade rivalry means that there's a good chance the current roster of tariffs on US$250 billion of Chinese goods exported to the US will grow, as President Donald Trump has threatened. With little room for optimism on external demand, the outlook for China's economy hinges increasingly on the effectiveness of targeted stimulus measures being rolled out this year.
The gauge for new export orders in the manufacturing PMI report fell to 48, the fourth consecutive month of contraction and the lowest reading since 2016.
"The further slowdown in China's official manufacturing PMI in September reflects the intensifying impact of the US-China trade war on China's manufacturing export sector," said Rajiv Biswas, APAC chief economist at IHS Markit in Singapore.
"The near-term outlook for the Chinese manufacturing export sector remains weak, albeit the Chinese government may apply some further stimulus measures to support growth."
The official non-manufacturing PMI picked up to 54.9, signalling that domestic demand for services and construction remains strong enough to mitigate some of the external headwinds that the economy is facing, for now.
"The government's support policy will start to have an impact in the fourth quarter, which could offset the damage of the trade war," said Gao Yuwei, a researcher at Bank of China Ltd's Institute of International Finance in Beijing.
"The efforts to shore up infrastructure investment has been driving up construction activity, and services industries normally perform better in the third and fourth quarter."
Bloomberg Economics early indicators on China's economy foreshadowed the pullback, showing that sentiment deteriorated in September. The report gives an advance picture of what's happening in China by aggregating the earliest-available indicators on business conditions and market sentiment.
That worsening follows on from a slowdown in industrial profit growth in August. Private companies fared worse than state-owned enterprises, but discrepancies in that data suggest that the picture for Chinese manufacturers may be worse than officially-reported growth rates show.
The official PMI report also indicates rising unemployment in the manufacturing sector, analysts including Wenqi Liu at China International Capital Corp. in Beijing., wrote in a note Sunday.
"We will continue to closely watch infrastructure and property investment growth, as they might lead the cyclical stabilisation," they wrote.
Officials have promised fiscal stimulus in the form of tax cuts and infrastructure spending to buffer the domestic economy somewhat from the effects of the trade dispute. Analysts also expect China's central bank will continue topping up liquidity in the financial system to support economic growth.
indices for retail, telecommunications, IT and financial industries in the PMI report were all above 55, showing robust activity, whereas the transportation and real-estate-services readings signaled contraction, according to the National Bureau of Statistics. Construction activity quickened noticeably, it said.
That construction uptick, if sustained, could be a sign that the measures aimed at boosting infrastructure investment are starting to kick in.
"The trade war with the US has had a negative impact, but as China's reliance on trade has declined, the influence is manageable overall," said Wen Tao, an analyst with China Logistics Information Center, according to a statement on its website.