China’s economic recovery has slowed down for the second consecutive month due to the contraction in manufacturing activity and slower growth in the service industry. The official manufacturing purchasing managers’ index fell to 48.8 in May from 49.2 in April, while the non-manufacturing PMI dropped to 54.5 in May from 56.4 in April. Several months of manufacturing readings below 50 would prompt the government to consider implementing stimulus policies that promote economic growth. The weaker economic data caused regional currencies to slide against the dollar and hit equity markets that were already weighed down by concerns about China’s uneven economic rebound.
Experts attributed the slow growth in the manufacturing sector partly to deflationary pressures caused by falling commodity prices and weak market demand. At the same time, the service industry, particularly industries such as airlines, shipping, trucking services, and telecommunications are experiencing strong expansion. However, there are still weaknesses in the real estate market. According to the official statisticians at the Bureau of National Statistics (BNS), continued weaknesses in production and demand have significantly slowed manufacturing in China.
The economic recovery in China has been exceptionally uneven. The divergence between the manufacturing and service industries is the driving force behind this. UBP’s senior economist for Asia, Carlos Casanova, stated that while pent-up demands for services would fade away in the coming months, the outlook for economic growth this quarter and the next is a bit more complicated than anticipated. There’s a growing gap between the service and manufacturing industries, and this gap could widen, leading to serious ramifications for the Chinese economy.
How The Chinese economy Struggled to maintain strong growth after Beijing relaxed draconian zero-Covid policies
Beijing’s earlier Zero-covid policies had stifled the Chinese economy’s growth, so policymakers introduced various measures to stimulate growth. The economy grew significantly in the first quarter of the year, but the pace has begun to slow down over the past two months. Reports indicate that real estate investment, credit, and industrial profits have declined, while retail sales have failed to meet analysts’ expectations.
Such discrepancies have led to questions about the government’s modest 5% full-year growth target. The weaker economic data also caused the Australian and New Zealand dollars to lose 0.5% and 0.4%, respectively, against the greenback. The RMB has likewise suffered, falling 3% since the start of the year.
Summary
For the second consecutive month, the Chinese economy’s growth contracted, with the manufacturing sector experiencing a decline in activity and the service industry experiencing slower growth. The government may have to consider enacting stimulus policies to revitalize the nation’s economy, which struggles to maintain significant growth following the relaxation of Beijing’s zero-covid policies earlier this year. The divergence between the service and manufacturing industries is causing a growing gap – one that’s affecting the Chinese economy negatively.
Additional Piece
The Chinese economy is the second-largest globally, and its performance has a ripple effect on the global economy. Weaknesses in the Chinese economy could weaken the financial health of other countries worldwide. Several factors affect the Chinese economy, such as fluctuations in global demand, government policies, and trade tensions.
One of the strategies that policymakers have deployed to stimulate economic growth is to promote industrial upgrading and structural transformation. This approach involves moving the country’s economy from being export-oriented to being innovation-driven. China also aims to shift production up the value chain, focusing more on high-tech industries that add value to finished products before exporting them.
Another approach that policymakers have implemented is reducing tax pressure on small enterprises, investing in environmental protection, and promoting scientific and technological innovation. However, the government must address the inequalities growing within the nation’s society, which may limit the slow growth in the economy.
Policymakers must ensure there’s an equitable distribution of wealth so that more citizens can enjoy what an expanding economy has to offer. China has an aging population that requires adequate care, and if citizens aren’t as financially healthy as they should be, then this can be a massive burden on the economy. In addition, ensuring national energy security can help sustain economic growth.
While the Chinese economy’s growth has been affected recently, the data signals growth and inflation continuing to rise over the coming years. Policymakers must act swiftly to address the challenges that grow within the Chinese economy, such as the gap between the service and manufacturing industries and the inequality within the country. If they do not address these challenges now, they are likely to lead to more significant problems in the future.
Conclusion
China’s economy has experienced significant growth in the past few years, aided by its ambitious infrastructure projects. However, the economy’s recent contraction has created opportunities for policymakers to explore new policies that promote economic growth. Reducing tax pressure on small enterprises, investing in environmental protection, and promoting scientific and technological innovation are some of the strategies that could help revitalize the Chinese economy. Policymakers must address the growing gap between the manufacturing and service industries, promoting more equitable wealth distribution and ensuring national energy security to drive China towards sustained economic growth.
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Chinese factory activity contracted for a second straight month, while service sector growth slowed, adding to signs of a slowing post-pandemic recovery in the world’s second-largest economy.
The official manufacturing purchasing managers’ index stood at 48.8 in May, down from 49.2 in April, according to the National Bureau of Statistics.
The non-manufacturing PMI, which covers activity in the service sector and industries such as construction, was 54.5 in May, down from 56.4 the previous month.
Economists said several months of manufacturing readings below 50, indicating a contraction, would lead the government to consider stimulus policies to support the economy, which has struggled to maintain strong growth after Beijing has relaxed draconian zero-Covid controls this year. Exports have also laggedas global demand for Chinese goods has not picked up.
“We expected the initial rebound to be led by consumption and services after the reopening and that the optimism would eventually translate into a broadening of the base of this economic recovery to include stronger manufacturing and investment,” said Carlos Casanova, senior economist for Asia at UBP. “This enlargement has not yet taken place.”
The weaker data pushed regional currencies lower against the dollar on Wednesday and hit equity markets which were already weighed down by worries on China’s uneven economic rebound. An index of Chinese stocks listed in Hong Kong slipped into bearish territory.
China’s economy grew rapidly in the first quarter, but the rebound has started to falter in the past two months. Real estate investment, credit and industrial profits fellwhile indicators such as retail sales fell short of analysts’ expectations, casting doubt on the government’s modest 5% full-year growth target.
“The foundations for recovery and development still need to be consolidated,” Zhao Qinghe, senior statistician at the BNS, said in a statement on Wednesday. In manufacturing, he said, “production and demand have slowed markedly.”
Hong Kong’s Hang Seng China Enterprises Index, which tracks large companies in mainland China, fell more than 2% on Wednesday, taking the benchmark index more than 20% below its recent high in January and the plunging into a bear market. China’s CSI 300 index of stocks listed in Shanghai and Shenzhen fell 1.2%.
The renminbi slipped 0.4% to 7.1051 Rmb against the dollar, sending it down almost 3% since the start of the year. The currencies of major exporters to China also sold off, with the Australian and New Zealand dollars losing 0.5% and 0.4% respectively against the greenback.
A sub-index for new export orders fell to 47.2 in May from 47.6 in April, “indicating weaker external demand,” Goldman Sachs said in a research note. The bank said deflationary pressures on the manufacturing sector were “partly due to falling commodity prices and weak market demand”.
The data pointed to strong expansion in service industries such as airlines, shipping and trucking services, and telecommunications, but continued weakness in real estate.
“There’s this growing gap between the service part and the manufacturing part,” UBP’s Casanova said, adding that “the economic recovery has been exceptionally uneven.”
However, pent-up demand for services after the end of Covid-19 controls would fade in the coming months, he said, making the outlook for economic growth this quarter and next “a little more complicated than we didn’t think so at the beginning of the year”.
Reporting by William Langley, Andy Lin and Hudson Lockett in Hong Kong, Joe Leahy in Beijing and Thomas Hale in Shanghai
https://www.ft.com/content/5f389a80-96f1-4979-8eeb-fe484dc10cad
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