China’s manufacturing crisis heightens risk of ‘downward spiral’

(Bloomberg) — China’s economic recovery weakened in May, sparking renewed fears about growth prospects and prompting calls for more central bank action to counter the slowdown.

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Manufacturing activity contracted at a worse pace than in April, while expansion in services slowed, official data showed on Wednesday, suggesting the post-Covid rebound had lost momentum. Investors sold everything from Chinese stocks and yuan to copper and iron ore.

China’s economic recovery from the pandemic has been driven by consumer spending on services, such as travel and restaurants, while manufacturing has lagged. The latest figures from purchasing manager surveys underscore this uneven trend, while raising questions about the strength of consumption in the economy.

“The stronger contraction in the manufacturing PMI suggests that the risk of a downward spiral, particularly in manufacturing, is becoming more real,” wrote Lu Ting, chief China economist at Nomura International (Hong Kong) Ltd. , and his colleagues in a note.

Calls are getting louder and louder for the central bank to take action, including reducing interest rates or the reserve requirement ratio for banks. While this could give financial markets a boost, it is unlikely to provide a significant boost to consumer and business confidence, which remains subdued. Industrial company profits continue to plunge and global demand is weak.

What Bloomberg Economics says…

The weak data points to a lack of confidence in the private sector and strengthens the case for further policy easing, especially on the monetary side.

– Chang Shu, Chief Asia Economist

Read the full report here.

A stronger recovery in China will also depend on a recovery in the property market, which accounts for about a fifth of the economy if related sectors are included. Home sales have slowed after an initial rebound as property developers continue to struggle financially.

Financial markets have been shaken by China’s shaky recovery. A gauge of Hong Kong-listed domestic stocks slid 1.9% on Wednesday to be the second-worst performer in Asia after the city’s benchmark. The offshore yuan weakened 0.46% to 7.1239 against the dollar as of 4:14 p.m. local time, extending its May loss to 2.9%, the highest in three months.

Copper futures in London fell, leaving the metal on course for its worst monthly loss in nearly a year. The sharp contraction in China’s steel PMI, which recorded a reading of just 35.2 – the lowest since July 2022 – saw iron ore in Singapore fall as much as 3.3%. Base steel prices rallied later in the session, although they remained below $100 a ton and reversed any gains made since the reopening of the Chinese economy.

“We believe China’s economy may be on the brink of a self-fulfilling confidence trap and believe decisive policy action is needed,” Citigroup Inc. economists led by Xiangrong Yu wrote in a report after the release. PMI data.

According to Citi, the People’s Bank of China will likely cut the interest rate on its medium-term loan facility – a policy loan for commercial banks – by 20 basis points in the rest of the year, and reduce the ratio of required reserves for banks of 50 basis points. Fiscal stimulus is limited, however, and “structural” easing measures could be taken by central government and via state policy banks, economists said.

The government has set a fairly conservative target of around 5% for this year, suggesting it sees limited scope for major stimulus. Economists polled by Bloomberg predict growth will hit 5.5% this year.

“There were a lot of pledges to support the economy earlier in the year, but none of that materializes, which is most frustrating for me,” said Yang Zhiyong, executive director of Beijing Gemchart Asset. Management Co.

Chinese state media quoted analysts on Wednesday as saying more growth-friendly policy measures could be on the cards, including interest rate cuts and more bond sales.

Beijing could also take targeted measures to stimulate the economy. Authorities are considering new tax incentives worth hundreds of billions of yuan for high-end manufacturing companies, according to a person familiar with the talks.

“China could be heading for a K-shaped recovery, with an uneven rebound in manufacturing and non-manufacturing activity in the near term,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. Sustainable Growth of China, if there are no efficient and effective policy measures to organize a broad-based recovery.

–With help from Chester Yung, Shikhar Balwani, April Ma and Jason Rogers.

(Updates with additional details.)

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