For the first time in three years the Chinese have seen a decline in their PMI numbers sufficient to slide into contraction territory. It is now sitting at 49, and that has set off some alarm bells all over the world.
The Chinese have been in the process of deliberately slowing their economy, which makes this number a little harder to interpret. If this was the US or Europe, such a decline would have analysts predicting the imminent return of recession. In China, the situation is much harder to interpret. This is a deliberate policy response more than a trend within the manufacturing community itself, and that suggests that China can reverse course and start to grow again at any point it chooses to. It is obviously not quite that simple.
Analysis: China is trying to contend with dual problems that require actions that work in opposition to one another—a situation shared by the US and Europe. On the one hand the country has been grappling with a growing and serious inflation issue. The food inflation rate has been almost 10% and overall inflation has been almost 6% in the past few months. The only way to reduce the inflation threat has been to clamp down on credit and to restrict bank activity. For several months, these efforts had been largely unsuccessful but, since the end of the summer, there have been signs that China is going to pull off that soft landing.
At the same time the country still faces the monthly burden of providing 1.3 million new jobs
a month just to keep pace with normal population growth. This kind of demand for increased employment is contrary to the trends favored for inflation control. The assumption is that China will have to start turning its attention back to job growth sooner than later and, when that happens, the country will see growth in its industrial sector again. Until then, the Chinese are not providing the kind of demand that many other nations have grown dependent upon. For example, the slowdown in the Australian economy over the last six months is attributable almost entirely to the slower Chinese economy.
Source: Chris Kuehl, PhD, NACM economist