China’s Manufacturing Activity Contracts for Third Consecutive Month

The manufacturing sector in China has witnessed a contraction for the third month in a row, adding to the pressure on policymakers in Beijing to address the slowdown in the world’s second-largest economy.

Official Manufacturing Purchasing Managers’ Index

The official Manufacturing Purchasing Managers’ Index (PMI) for June stood at 49, slightly up from May’s 48.8. However, this figure still indicates a contraction in month-on-month activity.

Slowdown in China’s Economic Recovery

Although the Chinese economy is experiencing growth compared to the previous year when the government’s fight against Covid-19 peaked, the pace of the recovery has faltered in recent months. Various factors contribute to this sluggishness:

• The country’s real estate sector, which represents over a quarter of economic activity, is facing a prolonged slowdown.
• Youth unemployment has surpassed 20%.
• Trade is shrinking due to the weaker global economy, with exports falling 7.5% year on year in May.

Services Sector Recovery

The services sector, which has been under sustained pressure during Covid-19 restrictions, showed a month-on-month rise with a PMI reading of 53.2 in June. However, it grew at a slower pace compared to May’s reading of 54.5, failing to meet analysts’ expectations.

China’s Economic Target

Beijing aims for 5% gross domestic product (GDP) growth this year, setting its lowest official target in decades after GDP growth was only 3% in 2020.

Optimism About Growth

Premier Li Qiang expressed optimism about China’s growth in a World Economic Forum event in Tianjin, stating that the growth in the second quarter would exceed the 4.5% recorded in the first three months of the year. He emphasized their ability to achieve steady growth and criticized attempts by the United States and Europe to “derisk” ties with China amid deteriorating geopolitical relations.

Recommended Reading

Before we delve deeper into the challenges faced by China’s economy, let’s take a moment to explore a recommended article:

Challenges Ahead

The People’s Bank of China, the country’s central bank, recently cut interest rates. However, authorities have not implemented any significant fiscal or monetary stimulus to address the disappointing economic data of the past few months. Economists anticipate the need for additional measures, such as:

• Infrastructure spending
• Relaxations of property purchase restrictions

Citi analysts highlight that the construction PMI figure of 55.7, while indicating expansion in the sector, is the lowest level this year, reflecting broader weakness in real estate. They suggest that the planned Politburo meeting, the Chinese Communist Party’s top decision-making body, in July could serve as an opportunity to discuss a more comprehensive package.

Deeper Insights

Now that we understand the current state of China’s economy, let’s delve deeper into the challenges it faces and explore unique insights and perspectives:

1. Impact of Real Estate Slowdown

The real estate sector plays a crucial role in China’s economy, accounting for over a quarter of activity. The prolonged slowdown in this sector has far-reaching consequences. Some key insights include:

• Decreased investment and construction activities affecting related industries, such as steel, cement, and home appliances.
• Increased financial risks due to the heavy reliance of local governments on land sales and property-related revenue.
• Concerns about the impact on employment and consumer spending as property developers face financial pressures and reduce new projects.

2. Youth Unemployment

The high youth unemployment rate of over 20% is another significant challenge. This issue has multiple implications for the economy and society:

• Diminished economic potential as a large portion of the population struggles to secure stable jobs and contribute to growth.
• Social unrest and discontent among the younger generation, leading to potential political and social challenges.
• The need for targeted policies and initiatives to address the unique challenges faced by young job seekers.

3. Trade and the Global Economy

China’s shrinking trade, particularly its decline in exports, reflects the challenges of a weaker global economy. Key insights in this area include:

• Reduced demand for Chinese goods and services due to slower economic growth in major trading partners.
• The impact of geopolitical tensions and trade conflicts, such as those between the United States and China, on global trade flows.
• The need for diversification of trade partners and export sectors to mitigate risks and maintain stable economic growth.

Summary

In summary, China’s manufacturing sector has experienced a contraction for the third consecutive month, indicating a slowdown in the country’s economic recovery. Challenges such as a real estate sector slowdown, high youth unemployment, and shrinking trade pose significant hurdles for policymakers in Beijing. Although the services sector shows some signs of recovery, achieving the targeted 5% GDP growth for this year remains a formidable task. Additional measures, including infrastructure spending and potential relaxations of property purchase restrictions, are expected to be discussed at the upcoming Politburo meeting. To overcome these challenges and sustain steady growth, China needs comprehensive and innovative strategies that address the root causes of the economic slowdown.

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Manufacturing activity contracted in China for the third month in a row, adding to pressure on policymakers in Beijing to tackle the slowdown in the world’s second-largest economy.

The official Manufacturing Purchasing Managers’ Index was 49 in June, up slightly from 48.8 in May, but still showing a contraction in month-on-month activity.

While Chinese economy is growing from last year, when the government’s three-year crusade against Covid-19 peaked before being abruptly abandoned, the pace of its recovery has faltered in recent months .

The country’s vast real estate sector, which accounts for more than a quarter of activity, is experiencing a prolonged slowdown, while youth unemployment has topped 20% and trade is shrinking amid a weaker global economy. Exports fell 7.5% year on year in May.

Friday’s official PMI data showed the services sector, which has come under sustained pressure during Covid restrictions, rising month-on-month, with a reading of 53.2 in June. But it rose at a slower pace from May’s reading of 54.5 and missed analysts’ expectations.

Beijing is aiming for 5% gross domestic product growth this year, its lowest official target in decades after growth was just 3% last year.

Premier Li Qiang said at a World Economic Forum event in Tianjin this week that growth in the second quarter would exceed the 4.5% recorded during the first three months of the year. “We are on track to achieve the growth target we have set for the year,” Li said.

“We have the ability to achieve steady growth in the Chinese economy,” he said in comments that also took aim at attempts by the United States and Europe to “derisk” ties with China. at a time of deteriorating geopolitical relations.

The People’s Bank of China, the country’s central bank, cut interest rates this month, but authorities failed to trigger any major fiscal or monetary stimulus in response to months of disappointing economic data.

Economists widely anticipate a series of additional measures, ranging from infrastructure spending to potential relaxations of property purchase restrictions.

Citi analysts noted that a construction PMI figure of 55.7, while indicating expansion in the sector, was at its lowest level this year and reflected broader weakness in real estate.

They added that a planned meeting of the Politburo, the Chinese Communist Party’s top decision-making body, in July would likely be “a window to discuss a more comprehensive package.”