Image from the Wall Street Journal

Back in late September, China’s manufacturing Purchasing Managers Index (PMI) had been revealed to have fallen to 49.6. PMI is an index showing the current direction of economic trends in both manufacturing and service sectors. October’s manufacturing PMI has fallen even lower, now at 49.2. PMI is measured on a 100 point scale, where numbers above 50 mean an increase, and numbers below 50 signal a decrease. The decrease is a result of power outages, higher material costs, and a decrease in domestic demand. This, combined with virus outbreaks, has slowed both consumption and production. Home sales and a decrease in average real-estate prices have contributed to the contraction as well.

This news comes as a huge shock because analysts had predicted the manufacturing PMI to be at 49.7. 49.2 is also the lowest manufacturing PMI since the beginning of the pandemic in February 2020. The production subindex has also decreased from 49.5 in September to 48.4 in October. The new order subindex came in at 48.8, decreasing for the third month in a row. The output price subindex rose to 61.1, which is extremely worrisome as that is the highest it's ever been since it was first published in 2016. According to official data, service sector activity also slowed down in October, from 53.2 last month to 52.4. An analyst at China Logistics Information Center, Zhang Liqin, says that around one-third of companies surveyed “listed insufficient demand as their biggest difficulty,” meaning that the reason for their production was because of lack of demand. On the bright side, China’s non-manufacturing PMI increased from 52.4 to 53.2. The composite PMI, which reports activity from both manufacturing and services, fell to 50.8 from 51.7 last month.

Beijing had set energy consumption targets to have China’s carbon emission peak by 2030, and local governments have been working hard to meet those targets since September. Thus, factories and companies have been forced to reduce, and in some cases even halt, production until further notice. This has caused many industries to suffer as a result, especially textiles, iron smelting and non-metallic mineral products. Construction has also been slowing, as regulators have been ordering developers to stop relying on China’s high debt. 

So how will this affect us? Well, according to Mo Ji of Fidelity International, “Even developed markets, including the U.S., would not be immune to a significant tightening in global financial conditions as a result of negative China growth shock accompanied by financial stress.” Prices for items here may also rise because of China’s current situation. Anything being made in China will be more expensive to produce, therefore causing all those items to be sold at a higher price. This can put us at a greater disadvantage, as the holiday season approaches and people will be buying gifts. As a result, Beijing has been pressured to ease borrowing controls and to spend more money on building infrastructure in order to increase manufacturing activity. Currently, predictors say that activity will continue to decrease until those changes take effect.

Sources:

China’s Manufacturing Slows for 2nd Straight Month in October: https://www.yahoo.com/now/chinas-manufacturing-slows-2nd-straight-081220957.html

China’s Manufacturing Activity Contracts for Second Straight Month: https://www.wsj.com/articles/chinas-manufacturing-activity-contracts-for-second-straight-month-11635645642

China’s Falling Factory Activity a Sign of Economic Woes Ahead: https://www.yahoo.com/now/china-factory-activity-contracts-second-011604983.html

China’s Economic Growth Weakens Amid Construction Slowdown: https://www.npr.org/2021/10/18/1046945534/chinas-economic-growth-weakens-amid-construction-slowdown

Purchasing Managers’ Index (PMI): https://www.investopedia.com/terms/p/pmi.asp