China’s manufacturing sees surprise gain in November but analysts warn economic downturn has yet to bottom out

Finbarr Bermingham

China’s economy showed signs of improvement in November, with the latest figures released on Saturday indicating increased manufacturing activity for the first time in six months, and continued expansion in the construction and services sectors.

But while the National Bureau of Statistics’ numbers will come as good news to Beijing, analysts say a number of issues, from the trade war with the US to high debt levels, will continue to weigh on the economy in the months to come.

The official manufacturing purchasing managers’ index (PMI) rose to 50.2 in November from 49.3 in October and above the 49.5 predicted in a Bloomberg poll of analysts.

The corresponding measure for the construction and service sectors – the non-manufacturing PMI – rose to 54.4 in the month, beating analysts’ expectations of 53.1 and October’s figure of 52.8.

In both cases, a reading above 50 signals growth in the sector, while a score below 50 indicates a contraction.

Despite the increases, Lu Ting, chief China economist at Nomura Securities, said that a similar stronger-than-expected rise in the PMI numbers in March proved to be a false dawn, as the economy continued to flounder in the months that followed.

“We don’t think such a rebound suggests a bottoming out of the economy, as strong growth headwinds remain, especially from the cooling property sector and China’s worsening fiscal situation,” he said.

We don’t think such a rebound suggests a bottoming out of the economy, as strong growth headwinds remain, especially from the cooling property sector and China’s worsening fiscal situation

Lu Ting

Liang Zhonghua, chief macro analyst at Zhongtai Securities’ research institute, said the upturn in November might be explained by October’s low base figure and the seasonal effects of overseas demand before Christmas.

“The average PMI for October and November was still weaker than September … the economy has not stabilised yet,” he said.

“The economic trend has not changed. During a downturn, short-term indicators are volatile, leading to fluctuations in market sentiment. But we must stay awake and not act rashly.”

Manufacturers have had a torrid time in 2019. Imports have fallen in every month except April, while exports have slipped in each of the past three months.

Within the manufacturing PMI, November’s production expanded at its fastest rate since March. Also, despite export orders falling for an 18th straight month, the overall orders subindex expanded, suggesting stronger domestic demand.

Although US officials and China’s state media continue to make positive noises about progress on a “phase one” trade deal, an actual agreement remains elusive, with the size of China’s agricultural purchases and tariff removal thought to be the main stumbling blocks. If a deal is not reached by December 15, additional US tariffs will be placed on Chinese goods.

The trade war has also dampened investor sentiment and consumer confidence, leading to a slump in global trade, which in September fell 1.3 per cent from August, according to figures released this week by the Bureau for Economic Policy Analysis, under the Netherlands’ economic affairs ministry.

Global growth slowed considerably in 2019 and we do not expect much improvement in 2020,” Moody’s said in a note

Moody’s

“Global growth slowed considerably in 2019 and we do not expect much improvement in 2020,” Moody’s said in a note. “Trade tensions have created an extra challenge for manufacturing and trade reliant economies, while heightened geopolitical risk and domestic policy unpredictability cast long shadows in many parts of the world.”

On Thursday, logistics giant DHL released its Global Trade Monitor, which aggregates large amounts of data to provide quarterly outlooks for early-cycle commodities such as brand labels for clothes, bumpers for cars and touch screens for mobile devices, containerised ocean freight and air cargo traffic.

It showed China’s growth outlook at its weakest point since 2016, suggesting that the positive traction from Saturday’s PMI may not last.

“Exports of consumer fashion goods are spiralling down from moderate growth to deflation. High technology, personal and household goods, machinery parts and industrial raw materials remain lacklustre,” it said.

While an interim trade deal with the United States might help slow China’s economic decline, analysts are generally not optimistic about its long-term benefit.

In a recent interview with CNBC, Yale Professor Stephen Roach described an interim deal as “hollow”.

“It’s politically expedient, especially for the US president who is feeling a lot of political pressures for other reasons at home,” he said.

“But it’s very flawed in that it focuses on a bilateral fix, operating on the US-China deficit to address America’s multilateral trade imbalances with 102 countries.”

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