China has been struggling to maintain momentum with its economy, something that has been rattling markets as of late. According to the flash market/HSBC purchasing manager’s index (PMI), China’s manufacturing sector has declined for the third straight month and the latest PMI reading, 48.1, was actually lower than February’s abysmal 48.5. This suggests that the industry is contracting at a sharper rate.
A purchasing manager’s index is an economic health indicator and is based on five factors: new orders, inventory levels, production, supply deliveries, and the employment environment. It is one of the most widely used indicators, especially for the manufacturing sector. A reading above 50 represents expansion while a reading below 50 represents contraction.
The HSBC PMI does not include as many government linked companies as the official PMI indicator, which is usually higher. In February, the official PMI was 50.2, representing a slight expansion. Government linked companies, however, are heavily supported by the Chinese government and thus the official PMI reading is viewed by some as an unreliable indicator of economic conditions within the country.
China’s latest PMI sets 8-month low
The February PMI had already spooked investors and policymakers, being one of the lowest seen in months. Now, the most recent reading of 48.1 has only set the bar lower and suggests that the world’s second largest economy might be suffering from a dramatic slowdown.
Perhaps worst of all, dropping domestic demand appears to be causing the slowdown. In the past, the dropping exports and international demand was often cited as the reason for any potential slowdown. In the face of a weak global economy, the Chinese government attempted to shift the economy away from its heavy reliance on exports and instead to rely more on local consumption.
While China remains heavily reliant on exports, the government’s efforts did pay off as local consumption began to rise. Now, however, the government’s continued push to drive up local consumption appears to be at risk. Retail sales have been weakening, along with local investment and other indicators.
Government looking to prop up the economy
Maintaining strong economic growth is very important for the Chinese government. While some might assume that the Communist Party of China would not be sensitive to the plight of its common citizens, the government is very concerned with employment and economic growth. In short, strong economic growth and low unemployment create stability and help ensure that the Communist Party remains in power.
The government has set its growth targets at 7.5% for the year, but this goal now seems to be in question. Many independent economists are projecting growth to come in at 7.4% or less. The government has promised, however, that it will prop up the economy with construction projects and other investments.