The Latest Chinese Data Was Bad, But Not Bad Enough For A Big Stimulus Package

china migrant worker

Photo: Cory M. Grenier on

China’s official manufacturing PMI contracted to 49.2 in August, below economist’s expectations of a decline to 50. This puts China’s manufacturing at a nine-month low.But a look at the sub-indices shows some truly worrisome signs for China. New orders fell to 48.7 in August, from 49.0 in July, while new export orders held steady at 46.6. This shows that there has been a decline in domestic demand.

Moreover the employment sub-index fell to 49.1 in August, from 49.5 the previous month.

We have previously argued that China won’t unleash a massive stimulus, because as part of China’s rebalancing, policymakers are comfortable with a slower pace of growth. Although premiere Wen Jiabao and president Hu Jintao have recently emphasised growth, they haven’t unleashed anything close to the 4 trillion yuan stimulus of 2008.

Instead policymakers are more concerned with employment growth. In recent weeks Chinese stocks were hit by reports that Beijing wouldn’t easy policy much further, but the weakness in employment shown in this manufacturing report suggests some action from policymakers might be in the pipeline, though another massive stimulus is still unlikely. Bank of America’s Ting Lu writes:

“Employment” dropped further to 49.1 in Aug from 49.7 in June. The further deterioration of labour market condition could push Beijing to step up policy easing/stimulus in supporting growth. In this year of leadership transition, employment and social stability should be of top concern to politicians. Note that “Employment” started dropping to below 50.0 in October 2011, which might help trigger a change in policy stance at that time.”

Lu expects a second round of policy easing including reserve requirement ratio cuts in September and October. But he warns that “the scale of easing/stimulus won’t be very big, and we should avoid taking local goverments’ long-term planning as short-term stimulus”.

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