While many of China’s factory workers were off the job enjoying this month’s Lunar New Year, signs emerged that demand from their global customers may be beginning to cool.
The manufacturing purchasing managers index fell to 50.3 in February from 51.3 the prior month, the biggest slump in five years and below the 51.1 estimate in Bloomberg’s survey. New export orders declined for second month, while the services PMI slipped to 54.4 from 55.3, the statistics bureau said Wednesday. Levels over 50 indicate improvement.
The weaker readings signal China’s economic growth and global trade may be starting to cool off, with flash PMI gauges for China’s major trade partners down slightly amid declines in Japanese and European manufacturing indexes. That comes as China’s top official heads to Washington and Communist Party leaders gather to set economic goals and reshuffle government officials including the central bank governor.
The possibility of a major trade war with the U.S remains low, according to Grace Ng, a China economist at JPMorgan Chase & Co. in Hong Kong. But industry frictions are likely to continue, she said.
“The risk is escalation of trade tension with the U.S.,” Ng said in a Bloomberg Television interview Wednesday. “China’s attitude has been that we want to come to terms and agreement with the U.S. to address the trade front rather than confrontation.”
The U.S. Commerce Department said Tuesday it imposed duties on aluminum foil from China after concluding that producers there get unfair subsidies and dump the product in the American market. The ruling adds to tensions just as President Xi Jinping’s top economic adviser, Liu He, heads to Washington this week for discussions on trade.
Meanwhile, elite officials in Beijing met this week to reshape the government, including top economic roles. They will also repeal presidential term limits to allow Xi to rule indefinitely. Policy makers are also likely to unveil new economic objectives at an annual legislative meeting that will start Monday while intensifying overhauls to address debt, pollution and poverty.
Other PMI data show:
- The composite index covering services and manufacturing fell to 52.9 from 54.6
- Manufacturing output dropped to 50.7 from 53.5
- Factory employment declined a fourth month, to 48.1
- The 44.8 reading for small businesses was the weakest in two years
- The steel industry PMI fell to 49.5 from 50.9 as output and new orders both fell
The deterioration in new export orders “highlights the risk of a cyclical downturn in the global electronic supply chain and has a direct bearing on the regional trade outlook,” said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.
The weighted average of flash PMIs for China’s major trade partners declined to 56.7 in February from 57 the prior month and December’s reading of 57.1, the highest since 2010, according to Bloomberg Economics. The index is a composite of U.S., euro-area and Japan flash manufacturing PMIs, weighted by each economy’s share of China’s exports.
What our economists say:
China PMIs signal “moderation in growth momentum and ebbing reflationary pressure in the factory sector,” Bloomberg economists Tom Orlik and Fielding Chen wrote in a report. “The drop in the price pressure that has buoyed industrial profits and made the deleveraging challenge more manageable is particularly striking. That said, disentangling the trend from the holiday effect around China’s New Year break in mid-February is hard to do.”
China’s week-long Lunar New Year holiday often distorts data for January and February as the accompanying factory shutdowns and office closures fall at different times each year. This year’s national holiday was from Feb. 15-21, later than last year’s start in January.
History shows that the February readings are within the normal fluctuation for the Spring Festival months, the statistics bureau said in a statement with today’s data. It said business expectations have held up and manufacturing activity is likely to resume its normal pace.
“It’s always very hard at the beginning of the year to make sense of how things are moving, so I wouldn’t read too much into a seemingly weak number,” Louis Kuijs, chief Asia economist at Oxford Economics, said Wednesday in a Bloomberg Television interview from Hong Kong. “We also had quite weak credit data in January and I think together this is indicating that we’re not seeing an acceleration, we’re seeing a softening of growth.”