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China’s Manufacturing Sector in Recession?

Reports continue to indicate that China’s manufacturing sector is continuing to slow down. HSBC, which publishes a monthly purchasing managers’ index, said China’s PMI was on track to fall to 48.1 in June, down from 48.4 in May.

The magic number for the PMI is 50; any number below suggests a contraction. If HSBC’s initial report is correct it would represent a seven-month low for China’s PMI. The Financial Times has more:

Virtually every component of the PMI survey, from manufacturing output to stocks of finished goods, pointed in a negative direction. But the declines were nowhere near as severe as late 2008 when the global financial crisis erupted.

Qu Hongbin, HSBC chief economist for China, said: “With external headwinds remaining strong, exports are likely to decelerate in the coming months. The sharp fall of prices and moderation of new orders suggest weak domestic demand, posing destocking pressures for Chinese manufacturers.

Earlier this month China’s central bank cut interest rates for the first time in four years. And while the government has repeatedly ruled out introducing another large 2008-style stimulus, the easing of monetary policy in conjunction with the fast-tracking of several new infrastructure projects signals its increasing concern with the health of the Chinese economy.

Europe, China, America, Japan, India: none of the world’s big economies have much good to report these days. It’s not a good time for political incumbents.

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  • Kris

    “Europe, China, America, Japan, India: none of the world’s big economies have much good to report these days. It’s not a good time for political incumbents.”

    Tell me about it. I predict that almost all members of the Central Politburo Standing Committee of the Communist Party of China will be replaced.

  • Luke Lea

    My latest reading on the Chinese economy is Capitalism with Chinese Characteristics by Yasheng Huang at MIT. One thing I learned which I didn’t know before is that most of poverty-reducing economic growth took place in the 1980’s (not the 1990’s or 2000’s) and was in rural areas, where a tremendous amount of local entrepreneurial talent with government financial support appeared almost out of nowhere. This was largely Deng Xiaoping’s doing.

    But with the Tienanmen Square demonstrations in 1989 the Party changed course. Rural credits were sharply reduced and investment was shifted to the cities, with special tax privileges and other incentives for foreign direct investment. It turns out that almost all the industrial development occurring is foreign owned and controlled, not just half of it as shows up in official statistics. Most of the “hidden” part is based in Hong Kong. The reason, Huang explains, is that the Chinese don’t trust truly independent private big businessmen who are Chinese citizens, and thus they don’t get the tax breaks and other special incentives.

    Instead all of the government credit is focused on real estate and infrastructure and major state owned enterprises in sectors such as energy, telecommunications, steel, banking, etc. Shanghai is almost completely a product of party/state spending. Apparently there aren’t even many private street vendors allowed in Shanghai. It’s a semi-Potemkin village as far as capitalism is concerned.

    Of course the new nomenklatura in China reaps enormous financial benefits from direct foreign investment in manufacturing for export. They split the profits (even though they don’t control the firms) and they capture the lion’s share of workers’ wages, which perforce are deposited in state owned banks at artificially low interest rates. That is where a lot of the capital comes from that builds freeways and apartment complexes and the like.

    Meanwhile poverty in China is actually increasing in rural areas, which is something we don’t read about. It’s as though the Chinese plutocrats are doing the same thing to their own people as our plutocrats are doing to us. This is not going to end well.

    We all know by now that Chinese statistics cannot be trusted or taken at face value.

  • richard40

    But I thought Paul Krugman told us that China was the model we all should be following. He won the nobel prize, just like Obama, he must know what he is talking about, right.

  • teapartydoc

    China has been relying on a macroeconomic (Keynesian) mercantilism. It will hit a wall just as the Western nations have. You can’t have free markets without free trade and free banking. Trying to do so is chimerical and will fail eventually, even if it takes a hundred years.

  • Luke Lea

    Like I was saying:

  • Luke Lea

    re: Chinese statistics

    For those who don’t know, an important factor in the mass famine in China during the Great Leap Forward was false reporting of statistics. Mao — who was out of his mind — ordered a tripling of agricultural output through more intensive cultivation. Local authorities reported out-sized gains — they didn’t dare call the Chairman a fool — after which the government took a big share as tax to feed the urban population. On paper this should have left plenty of food in the countryside, but of course it wasn’t there. Mao lived in a bubble of fantasy and ignorance; no one dared tell him the truth. People starved be the tens of millions. Families ate their own children (young daughters) and corpses. It was the largest famine in recorded history.

    Similar motivation still rules in China. Local officials have quotas to meet if they expect to be promoted. They lie. China lies, It is a system of lies.

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