China's manufacturers feel pinch as trade war escalates

New Straits Times, October 1, 2018

Two gauges of activity in China’s manufacturing sector worsened last month, reflecting the nation’s economic slowdown and the fallout from the trade war with the United States.

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, fell to 50 from 50.6, the lowest since May last year.

A reading of 50 is the dividing line between expansion and contraction.

At the same time, 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.

President Donald Trump’s administration has now imposed tariffs on a total of US$250 billion of goods imported from China, while China has responded with higher levies on US$110 billion worth of American goods.

The gauge for new export orders in the manufacturing PMI report fell to 48, the lowest reading since 2016.

With the slowdown in view, the government has rolled out a range of targeted stimulus measures since the middle of the year, aimed in particular at boosting infrastructure investment.

“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 here.

“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 last month.

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 stateowned enterprises, but discrepancies in that data suggest that the picture for Chinese manufacturers may be worse than official growth rates show.

Officials have promised fiscal stimulus in the form of tax cuts and infrastructure spending to insulate the domestic economy 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.