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Economy in Brief

China's PMIs Erode As Services Pullback Sharply
by Robert Brusca  August 31, 2021

China's nonmanufacturing PMI slipped below the boom-bust line at 50, signaling contraction in August. The index fell to 47.5 in August from 53.3 in July. This is the first contraction since February 2020 when the economy was hit by the first wave of Covid-19.

The line on the manufacturing sector has been uniformly weak but has held above 50 since the Covid crisis struck. Its last observation below 50 also was in February 2020.

The composite value for August is an estimate since the composite is not released early. I estimate it to be well below 50 for the first time since April 2020.

The queue standings for the Chinese PMI and its components are all extremely weak. Manufacturing has a 23.2 percentile standing; nonmanufacturing has an even weaker 1.8 percentile standing. The composite that is estimated and ranked on a different timeline has a 5.4 percentile standing. All of these are uncomfortably weak even though manufacturing skims above the expansion-contraction line – it barely does that this month. Any further weakness in manufacturing and that will put the sector at a standstill or worse.

China's official Covid statistics show overall infections are extremely low. But China remains super sensitized to any incidence of infection when it appears. It has instituted various regional lockdowns that have impaired its economic recovery. There were over the past month travel restrictions and quarantines bolstered by mass testing to contain Covid (for more). Currently most of the China news on the virus is push back against the ambiguous report of the origins of the virus that the U.S. just issued (more). China has mounted its own offensive on where the virus started; not surprisingly it manages to blame the U.S. even though the outbreak began in China and spread. China somehow argues that it began in the U.S. and spread to Europe. It seems to me this notion is so steeped in politics and so disconnected from the facts of the spread of the virus, it should be without impact. But many in China apparently believe it – the power of control of the media! China is not even willing, it seems, to admit that the virus may have started there in a natural way. It is not just pushing back against the notion of lab-leak. The problem is that anything having to do with China and the virus is hard to take as authoritative because of Chinese efforts to spin all news on the virus. China sponsored articles from Chinese owned newspapers and outlets have proliferated creating phony testimonials (see this), pushing these views, and burying the truth- whatever it is.

China's economy continues to plow ahead. Its exports and imports are growing. Its trade surplus is gradually getting larger as well. However, during the month China's second biggest container port was partially shut down because a dock worked had contracted Covid. That must have had some knock-on impact on the economy.

China's CPI has continued to move more or less sideways at a pace below 2% while the PPI has surged.

Those doing business in China point to conditions that are improving but still cite the presence of supply chain issues.

China policy seems much less fixated on growth that it once was and more fixated on creating the kind of economy it wants to develop with a focus on mitigating the power and influence of rich Chinese and of powerful Chinese corporate groups. China is trying to restrain monopoly and market power. Chinese leaders seem to have learned from the Russian experience about the potential power of the oligarchs and have moved to blunt their influence in China. Xi Jinping seems already focused on the next party meeting to consolidate his power and push for more changes.

Chinese politics may also be at work in the stumbling of the service sector as not only were there problems with the virus but with a crackdown on Chinese corporations that are mostly operating in the service sector. After Jack Ma's ANT ran afoul of the government by being critical of its regulatory structure, the plug was pulled on his company's IPO. The next high-profile intrusion was action against tutoring companies. And just this week there is a limitation announced on how many hours youngsters can engage in on-line gaming. China's intrusion to herd and control society are no longer mindful of whether they have adverse consequences for growth. China has some sort of societal objective that exists in Xi Jinping's head and is playing out week by week in China with no notice.

Because China is so close to the chest with data especially on the virus, it is hard to know how much of this month's impact is virus-related. But elsewhere in the world, the virus is causing trouble. Even places that started out with great success are now succumbing to the outbreak of infection. Covid seems to lurk in every shadow of economic interruption and doubt these days. No country is immune. Ironically those that have been the most successful in keeping the virus at bay may be the most at risk for spread, since they will have the least natural immunity in their population. And now we are hearing about how vaccine protection wears out. It's always something.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.

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