Times are getting tougher for China's manufacturers--even before the government shut them down to let APEC delegates breathe more easily.
Photograph by Xiao Lu Chu — Getty Images
By Geoffrey Smith
November 20, 2014

China’s factory output shrank in November and overall activity in the sector stagnated, raising further fears about the health of what has been the world’s fastest-growing large economy for the last two decades.

A purchasing managers’ index compiled by HSBC and research firm Markit for the Chinese manufacturing sector fell to 50.0 from 50.4 in October. That was a six-month low and was below economists’ expectations of a 50.3 reading. According to the index, a level of over 50 reflects growth.

It wasn’t clear how much the survey may have been affected by the Asia-Pacific Economic Cooperation summit in Beijing earlier in the month. Factories in six regions around the capital had been partially or completely shut down ahead of the event to improve air quality while the foreign dignitaries were in town.

The manufacturing output component of the PMI actually contracted, falling to a seven-month low of 49.5 from 50.7 in October, driven largely by slowing export orders. China’s export sector is finding life increasingly difficult as the authorities haven’t allowed the renminbi to fall against the dollar this year. With the dollar rising across the board, that means that China’s firms have lost some ground vis-a-vis their main competitors.

That’s nowhere more true than in Japan, where a strong rise in new export business kept the manufacturing PMI clearly in growth territory at 52.1 (although that’s down a touch from 52.4 in October). The yen has hit a series of multi-year lows against the dollar this year under the influence of a huge stimulus program by the Bank of Japan.

The survey also provided fresh evidence of sharp disinflationary pressure, with both input and output prices continuing to fall for the fourth month in a row, albeit at a slightly slower rate than in October.

Hongbin Qu, HSBC’s chief economist for China, said that the survey pointed to a shortage of demand in the economy, and said Beijing should do more to cushion the slowdown.

“Growth still faces significant downward pressures, and more monetary and fiscal easing measures should be deployed,” Qu said, pointing to “uncertainties” in both the real estate and export sectors.

The survey follows other recent data showing house prices in decline all across the country after an uncontrolled boom, and a sharp rise in bad loans in the banking sector (albeit the officially acknowledged bad loans are still well below those seen in other housing busts in the world. The employment component of the PMI survey suggests the sector has been shedding jobs constantly for over a year.

Rob Wood, an economist with Berenberg Bank in London, said that “the full gamut of data do point to China gradually losing some momentum, possibly a touch faster than the authorities may be comfortable with–hence speculation that the authorities will inject more stimulus could rise.

The government still forecasts growth of 7.5% this year, but President Xi Jinping has said it wouldn’t be a “disaster” if it slowed to 7% next year.

 

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