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China's manufacturing grows at slowest pace for 14 months

China's manufacturing grows at slowest pace for 14 months

The pace of growth in China's manufacturing sector slowed in August, according to the latest PMI survey.

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By Jay Banerjee 05.09.2018

The pace of growth in China’s manufacturing sector slowed in August, according to the latest PMI survey. This is yet another sign that China’s economy is facing downward pressure as the trade conflict with the US continues to play out, and it may prompt the government to pursue further growth-boosting measures.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) grew at its slowest rate for 14 months, with the 50.6 figure representing a drop-off from July’s 50.8. That number is in line with forecasts from analysts and again points toward an extended cooling of China’s economy during the remainder of the year.

Any index reading above 50 still shows growth, and August was the 15th month in succession that recorded a reading above that mark. However, not since June 2017 has there been a weaker PMI, and while output inched higher, other readings were not as healthy.

For example, export sales dropped for the fifth month in a row, and employers reduced the number of employees on their books. Caixin and Markit said in a joint press release that confidence was low last month due to “subdued” market conditions and concerns about the long-running trade dispute between the US and China.

"The manufacturing sector continued to weaken amid soft demand, even though the supply side was still stable...I don't think that stable supply can be sustained amid weak demand,” CEBM Group Macroeconomic Analysis Director Zhengsheng Zhong said. “In addition, the worsening employment situation is likely to have an impact on consumption growth. China's economy is now facing relatively obvious downward pressure."

Analysts had expected China’s economy to cool even before the trade conflict escalated in early summer. This sentiment arose in part from government measures to reduce financial risks and lower levels of debt, which subsequently made it more difficult for small and medium enterprises to secure funding and afford the costs of borrowing.

China’s economy has appeared remarkably resilient to the trade war thus far, but reports showing weaker exports indicate that it may finally be having an impact and adding to pressures that were already present before July. This has caused a ripple effect that is impacting China’s factories and other industries.

The latest PMI survey also showed that new export orders have retreated for the longest period for more than two years. The sub index is a key indicator for future activity, and it was again well below 50 in August. This has led to the weakest growth of new business, both domestically and overseas, for 15 months.

The slowdown is a concern, especially as the Trump administration has threatened to introduce further levies on $200bn worth of Chinese goods in September. To stimulate growth, policymakers have recently greenlit road and rail projects and are trying to cut business costs, and it may need to intervene again in the coming months.

While China’s manufacturing PMI slowed last month, Singapore ended its recent slump with a 52.6 reading for August. Manufacturing growth had slowed for four successive months, but it has delivered a reading in excess of 50 for two years. The Singapore Institute of Purchasing and Materials Management (SIPMM) said that a wave of new orders and exports drove the latest rise.

Manufacturing and electronics improved last month, and OCBC Bank’s Head of Treasury Research and Strategy, Selena Ling, said that Singapore has thrived despite geopolitical tensions. She added: “This suggests that the domestic manufacturing momentum is withstanding the deterioration in the external economic environment due to the US-Sino trade war relatively well." However, Ling warned that a new round of tariffs on Chinese imports would test optimism going into the fourth quarter.

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