China's economy is now facing 'relatively obvious downward pressure'

Mohd Rasfan/AFP/Getty Images
  • Activity levels across China’s manufacturing sector improved at the slowest pace in 13 months in August.
  • New export orders fell for a fifth consecutive month, indicating a weakening in global demand.
  • Caixin Insight Group says China’s economy is now facing “relatively obvious downward pressure”.

Activity levels across China’s manufacturing sector improved at the slowest pace in over a year last month, undermined by continued weakness in demand from abroad.

The IHS Markit China Manufacturing Purchasing Managers Index (PMI), produced in conjunction with the Caixin Insight Group, fell to 50.6 in August in seasonally adjusted terms, down from 50.8 in July.

While in line with market expectations, it was the weakest result since July 2017.

IHS Markit

“Latest data indicated that demand conditions softened with total new business rising at the slowest pace for 15 months,” IHS Markit said.

“Weaker foreign demand contributed to the softer increase in overall new work with export sales declining for the fifth month in a row.”

As such, confidence levels towards the year ahead remained entrenched near six-month lows.

“Confidence towards future output remained stuck near June’s six-month low with a number of panellists citing concerns over the impact of
the ongoing China-US trade war and relatively subdued market conditions,” IHS Markit said.

However, despite continued weakness in demand from abroad, the group said overall output levels increased at the fastest pace this year, indicating that “cooling demand and strong supply existed at the same time across the manufacturing sector”.

That’s a trend that Zhengsheng Zhong, Director of Macroeconomic Analysis at Caixin Insight Group, believes will be hard to sustain in the months ahead.

“Generally speaking, the manufacturing sector continued to weaken amid soft demand, even though the supply side was still stable,” he said.

“I don’t think that stable supply can be sustained amid weak demand.

“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.”

This IHS Markit PMI measures perceived changes in activity levels across China’s manufacturing sector from one month to the next.

Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

It tends to focus on small to medium-sized manufacturing firms whereas China’s official manufacturing PMI, released by the government, captures responses from small, medium and large-scale manufacturers, including state-backed firms.

In August, the official manufacturing PMI rose to rose to 51.3 in seasonally adjusted terms, a modest improvement on the 51.2 level reported in July.

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