ANZ: China may struggle to achieve its 7% growth target this year

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China’s official manufacturing PMI, released on Tuesday, may have fallen below the benchmark level of 50 in August, and if momentum does not pick up soon, it is very likely that China will not meet its growth target of 7% this year.

That’s the view of Li-Gang Liu, Raymond Yeung and Louis Lam, ANZ’s China economics team, who suggest recent “anecdotes point to continuous sluggishness of manufacturing activities”.

Citing the Caixin flash manufacturing PMI survey, a preliminary reading on manufacturing conditions for small to medium-sized firms in China which skidded to a six year low in August, along with falling steel production and auto plant closures as a result of the massive port explosion in Tianjin, they suggest the China’s manufacturing sector may have contracted in August.

The National Bureau of Statistics gauge, like all PMI surveys, measures conditions and activity levels across China’s manufacturing sector. A reading above 50 suggests activity levels are improving, while a sub-50 level suggests they are declining.

Not only do the trio believe activity across China’s manufacturing sector may have contracted in August, but it may well be the start of a longer-lasting trend, something that will likely weigh on economic activity in the second half of the year.

Here’s their assessment.

“If the official PMI falls below 50 in August as we forecast, the risk is that sluggish momentum of real activities will extend into September and Q4 after the summer lull. The likelihood of China’s Q3 GDP falling below 6.5% will increase significantly. In this case, China will unlikely achieve its full year growth target of 7.0%. This will continue to call for more proactive fiscal policy implementation as well as monetary policy easing”.

If this is correct it will mark the first time since January 2015 that the government’s PMI gauge has fallen into contraction territory.

The release, along with that for non-manufacturing sectors, will be released at 11am AEST on Tuesday.

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