China

Why China's Manufacturing Sector Has Hit a Wall


More bad economic news out of China: A key indicator released on March 24 showed that the manufacturing sector of the world’s second-largest economy contracted for the fifth straight month.

The HSBC and Markit purchasing managers’ index fell to 48.1 in March, below the 48.7 expected by analysts in a Bloomberg News survey (a number above 50 indicates growth). “The weakness appears even more pronounced given that there is usually a seasonal rebound after the Chinese New Year holiday,” said Julian Evans-Pritchard, China economist at London-based Capital Economics, in a March 24 note.

The lackluster showing of the so-called Flash PMI (usually based on results from 85 percent to 90 percent of companies surveyed; the final reading will be released April 1) follows weak investment, industrial production, and export numbers in the first two months. “The old growth engine is losing steam,” Chen Xingdong, chief China economist at BNP Paribas in Beijing, told Bloomberg News.

Now some economists are predicting China’s leaders will have to take steps to boost growth in order to meet this year’s gross domestic product target of “about” 7.5 percent. “Weakness is broadly-based with domestic demand softening further,” Qu Hongbin, Hong Kong-based chief China economist at HSBC, said in a statement. “We expect Beijing to launch a series of policy measures to stabilize growth. Likely options include lowering entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower.”

China’s slowing economy may mean a more gradual implementation of the sweeping market opening, proposed at the Third Plenum, a key party meeting held last November. While some reforms may support growth (such as opening more space for private capital), others, such as pushing enterprises to deleverage and reducing excess inventories, are expected to have a dampening effect on GDP.

“The brief honeymoon period in which China’s leadership could deliver both structural reforms and accelerating growth is now over,” warned Andrew Batson, China research director at Beijing-based GK Dragonomics, in a January note.

“China has its eyes fixed firmly on its next destination—aiming for higher-quality, more inclusive, and more sustainable growth,” said Christine Lagarde, managing director of the International Monetary Fund, speaking in Beijing at the opening of the China Development Forum on March 23. “The reforms needed to reach this destination … are ambitious. They will require hard decisions and trade-offs,” she said before the latest manufacturing release.

Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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