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Economy in Brief

China's PMIs Weaken Sharply
by Robert Brusca  May 2, 2022

China continues to post weak and weakening PMI numbers in April. The manufacturing index fell to 47.4 in April from 49.5 in March. This marks the second month in a row that the manufacturing index is below 50, indicating that manufacturing activity is contracting in China. China's nonmanufacturing index fell extremely sharply to 41.9 from March's 48.4. This is also the second month in a row that nonmanufacturing (an amalgamation that includes the services and construction sectors) shows a decline in activity for that joint sector.

The drop in manufacturing in April was relatively sharp. Over the last 15 years, there are only ten months in which the manufacturing index fell more sharply in one month than it did in April. Nonmanufacturing fell by 6.5 points in April, marking it as the second largest decline in the history of this index going back to 2007. The largest nonmanufacturing decline came when COVID struck in 2020; in February of that years the manufacturing sector fell in one month by 24.5 points...of course, it also rebounded by 22.7 points the very next month.

These statistics tell us that the ongoing assessment of these two sectors in China is weak and that the near-term weakness has become more intense. China continues to suffer some great difficulties on the economic front because of its decision to continue to pursue a zero COVID policy. The zero COVID policy refers to a policy goal in China to eliminate COVID. China has no tolerance for any infection whatsoever.

While the rest of the world is learning to live with COVID and with infections, to manage hospitalizations and illnesses, as well as to develop treatments, China's policy of complete intolerance and of shutting the economy down and literally fencing people into the places that they live so that they cannot mingle with other uninfected people is having dramatic impact on the economy and creating extreme distress among people in China.

Despite the extreme unpopularity of this program, China shows no signs whatsoever or backing off it and - quite the contrary – its leaders seem to be even more committed to the goal as time passes. China is pursuing this strange strategy of lockdowns and isolations and it is employing so much testing that it has stopped administering inoculations of the vaccine.

The new strains of COVID have proved to be far more transmissive than the earlier strains of COVID but not as dangerous and certainly not as lethal as the earlier strains. This explains why the rest of the world has found that it can make some sort of peace with the virus by controlling it and dealing with outbreaks when they occur.

An added problem here is that this is the well-known coronavirus. Science knows it is a class of virus prone to developing variants. As a result of this tendency to develop changes, it has been very difficult to develop truly effective vaccines against COVID. However western medicine has discovered vaccines and treatments that were developed for the earlier strains of COVID that generally have some usefulness in combating some of the later strains that have developed even though the vaccine may become less effective overtime. The vaccines are not very 'vaccine-like' as they only can stop infection for a brief period of time immediately after inoculation. That protection wears off quickly and then, people who are double vaccinated and boosted, can still get infected- but they have less risk of extreme illness or death.

China's approach to COVID has left it with a manufacturing PMI that shows a steady slide; its 12-month average slips to a lower six-month average and to a lower three-month average with a particularly sharp plunge in April. The nonmanufacturing index also shows the same sequential set of declines that are even clearer and more substantial with an even larger plunge in April.

As for the geopolitical front, China continues to profess its solidarity with Russia although having been somewhat coy about admitting to or agreeing to resupply Russia in the face of Western sanctions. And as for Russia's war with Ukraine, China continues to press for some kind of peace deal and also finds a way to place most of the blame for what has transpired on the West.

But the impact of the war is becoming increasingly broad especially as it now has spread quite clearly to foodstuffs not only because of impeding food exports from Ukraine but more importantly because of the loss to the world economy of fertilizers. That is a severe blow. The outlook for global harvest of various crops is now substantially worse than before the war- not just for crops from Ukraine. This is something that through the price mechanism is going to affect every economy in the world.

Meanwhile, the war shows no signs of scaling back its intensity. Neither side shows any sign of backing down. There is at this time no sense of the potential for any agreement, and instead, Russia keeps hinting that the war could broaden and that the use of dangerous weapons could mushroom unexpectedly at any time. Just about every forecasting agency has been reducing its forecasts for global growth. It remains quite unclear what lies ahead besides more war and more risk. China is an onlooker and I'm sure 'it is taking notes' on how this is progressing since it has its own designs on Taiwan and has in the past threatened to use force when it does not get what it wants.

So much for 'the end of history' Mr Fukuyama.

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