China, the world’s second largest economy, has recently posted yet another interesting statistic. The PMI, an index that tracks China’s manufacturing industry, has fallen yet again to 47, below forecasts of 47.5. To put things in context, a score below 50 indicates a contracting sector. 47 is a score that has not been seen since the GFC in 2008. Given that in 2014, manufacturing contributed a whopping 44% of China’s GDP, this is bound to have ripping effects around the world.
Economists have argued that this happened because of slowing domestic and international demand. More importantly, what does this mean for China and the rest of the world?
On the domestic front, this further supports the Fed’s decision to keep interest rates at near 0 figures. This could potentially drag on the decision to raise rates. Chinese policy makers have cut interest rates multiple times in the past few months, but to little effect. Domestic demand has yet to pick up. In my perspective, they should take on a different approach to increase domestic demand to justify Xi’s assurance that China is still expecting fast growth.
Should tackling China’s weak manufacturing sector be a concern? A lot of economists argue that it should, as manufacturing has driven China’s growth for a large part of the past three decades. However, I feel that this indicates a gradual shift in China – from a manufacturing powerhouse to a service-based economy. China’s service sector has been growing rapidly over the past few years. As the Chinese move away from the labor-intensive and low value production in the agricultural and manufacturing sectors, to the more technology-intensive service sector, this may signal a budding source of growth for China. It is this kind of structural change that China needs to really propel it to break that barrier of slowing growth and domestic demand. Perhaps, this may not be bad news at all.