Contraction in China’s July Manufacturing PMI
China’s manufacturing PMI
According to a report by the National Bureau of Statistics of China, China’s final manufacturing PMI (purchasing managers’ index) stood at 49.9 in July 2016, compared to 50 in June. That was below Market expectations. This is the first time that the index fell into the contraction zone since February 2016. A level below 50 indicates contraction.
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China’s (FXI) (YINN) manufacturing PMI in July indicated a slowdown in business activity, compared to June. New orders and new export orders fell sharply during the month, while output rose slightly. Production volume also fell marginally. There was also a contraction in raw material inventories and employment.
However, China’s (ASHR) (MCHI) Caixin Manufacturing PMI, which tracks the performances of small-scale private industries, showed some improvement. It stood at 50.6 in July, compared to 48.6 in June. It beat the Market expectation of 48.8. This shows that small-scale private industries performed better than large-scale industries in July.
What does this indicate for the economy?
These weaker PMI numbers indicate that China’s overall economic condition, as evidenced by its GDP, could be weaker in 2Q16. The country’s first-quarter economic growth stood at 6.7%, the slowest growth since the subprime crisis of 2008. Second-quarter GDP growth may slow down further due to weaker demand in China and throughout the world (ACWI) (VT) (VEU). However, to avoid a sharp fall in economic growth, the Chinese government may take proactive steps with fiscal stimulus.
The Chinese economy is in a transitional phase (from a manufacturing hub to a service-oriented economy). According to Mark Mobius, executive chair of Templeton Emerging Markets Group, this transition will take five years. This transition is expected to support growth in the economy in the long term.
In the next part of this series, we’ll analyze the performance of Japan’s manufacturing PMI in July.