The Chinese economy, it seems, is stuck in a nasty rut.
A closely watched barometer of China’s economic performance – a monthly survey that measures the conditions in the giant manufacturing sector – slumped sharply in August, offering one of the earliest glimpses of how the month has been progressing. The prognosis, judging by a preliminary reading of the survey published Thursday, was poor.
The purchasing managers’ index, released by HSBC, sagged to 47.8 from 49.3 in July, the lowest level since late last year. That dashed hopes that conditions in the sector would stabilise, or even edge up slightly, during August. Analysts described the reading as “disappointing,” “alarming” and “just awful.” A reading below 50 indicates contraction; above 50 indicates growth.
“The unexpectedly big drop more than reversed the gain seen in July,” Yao Wei, a China economist at Societe generale in Hong Kong, said in a research note. “A drop of this magnitude and a level significantly below 50 unambiguously spells trouble.”
The Chinese economy has been languishing for months, its domestic performance undermined by weakness in the important property sector and its export sector hit by sagging demand from overseas.
Growth in the United States remains anemic, while the festering debt crisis in Europe has weighed heavily on a part of the world that is a key destination for Chinese goods. Data from Europe released Thursday underlined the retrenchment there: A business survey reinforced expectations that the euro zone was already in recession and that the economic powerhouse of Germany was less and less able to prop up the rest of the region.
The drawn-out woes have gradually rippled around the globe, undermining the growth momentum of once-buoyant economies like China. Exports have been slowing for months, and in July they edged up a mere 1 percent, official statistics this month showed.
And although the economy has by no means come to a complete standstill, slowing growth is showing through in the form of disappointing earnings.
On Thursday, Li Ning, one of China’s best-known sportswear retailers, and Ajisen, a restaurant chain, reported steep slides in sales and earnings during the first half of this year. And in the financial sector, Bank of China reported net income for the April-June quarter of 34.8 billion renminbi, or $5.48 billion. Although that was a 5.3 percent increase from a year earlier, the pace of growth was the slowest since 2009.
At the same time, the waning momentum in China is eroding the country’s ability to drive growth in the rest of the world.
Qantas, the Australian airline, canceled a major plane order Thursday after reporting a loss for the year that ended in June. Its chief executive, Alan Joyce, cited the “uncertain global context” for the decision not to go ahead with the purchase of 35 Boeing Dreamliner jets.
Similarly, slowing demand for raw materials from China prompted the Australian mining giant BHP Billiton to delay major investment projects on Wednesday.
“That’s two Australian economic icons making retrenchments in the space of two days,” said Glenn Maguire, senior economist at Asia Sentry Advisory, a research consulting firm in Sydney. “The slowdown in China appears to be much broader and durable than people had expected even just a few weeks ago.”
What is more worrying, analysts said, is that the poor global backdrop heralds more pain to come for China, which despite its slowing growth remains a major growth engine for the global economy.
The slump in the purchasing managers’ reading Thursday “confirmed that China’s slowdown has yet to abate, with a growing risk of further intensification,” Qu Hongbin, chief China economist at HSBC, said in a research note.
New export orders, which are also captured in HSBC’s survey, declined sharply, indicating that Chinese exports were likely to languish for some time. Moreover, Qu noted, domestic demand failed to show a meaningful improvement in August.
Analysts said the Chinese economy appeared to have largely shrugged off the mounting doses of economic medicine injected by the authorities.
Banks have been instructed to lend more since last year; infrastructure projects have been stepped up markedly; and the central bank lowered interest rates in June and July. The central bank has also been injecting more money into the interbank market in an effort to stimulate lending.
Many economists have been puzzled that the authorities have not stepped up their stimulus efforts more aggressively in recent weeks, as the extent of the slowdown has become more apparent.
Many expect the central bank soon to announce another cut in the so-called reserve requirement ratio for banks – a step that would free up more money for them to lend – while some expect a cut in interest rates.
“A lack of swiftness in policy response to China’s fast deteriorating employment situation could cost the economy heavily, in the way of consumer consumption and social stability,” Qu of HSBC said.
Some analysts, however, are now beginning to believe that Beijing may hold off on any such steps for the time being; they caution that China may not start to reaccelerate until late 2012 or even early 2013.
“The central bank seems to be very concerned about excess capacity and the potential for reigniting a rise in property prices – that is something they really want to avoid,” said Maguire of Asia Sentry Advisory. “The path of least regret at this stage could well be for them to do nothing and wait for the structural reforms to the economy to filter through, but that is a process that has to be measured in years rather than months.”