China’s factory activity last month fell into contraction territory amid a trade dispute with the US that has seen higher tariffs slapped on Chinese exports.
The Chinese National Bureau of Statistics and an industry group, the China Federation of Logistics and Purchasing, yesterday said that the composite purchasing managers’ index (PMI) of China dropped to 49.4 last month, down from 50.1 in April on a 100-point scale, marking a three-month low. Any reading below 50 shows that activity is contracting.
“We believe that the contraction in new orders means domestic manufacturing activity has been affected by both the trade war and the technology war,” ING Greater China economist Iris Pang wrote in an analysis.
The world’s two biggest economies have been locked in a standoff over trade balances and technology, including allegations that China uses unfair tactics, such as stealing trade secrets.
The administration of US President Donald Trump has imposed 25 percent tariffs on US$250 billion of Chinese imports, with plans to tax another US$300 billion in imports that have so far been spared. It escalated the stakes last month by effectively barring US companies from supplying communications equipment maker Huawei Technologies Co (華為) with computer chips, software and other components without US government approval.
The technology issues will “put pressure on manufacturing activity for the whole of 2019,” Pang wrote, adding that she expected the Chinese government to order localities to speed up the pace of infrastructure projects to help manufacturing activity return to growth.
The PMI figures released yesterday appear to show that “economic growth in China has yet to bottom out,” Capital Economics senior China economist Julian Evans-Pritchard wrote.
The fall in PMI was mostly driven by a weakening in new orders, Evans-Pritchard wrote, suggesting that Washington’s latest tariff hike “may already be undermining foreign demand.”
Non-manufacturing PMI held steady at 54.3 and the subindex for the service sector was up slightly. However, the subindex for construction hit a 15-month low, pointing to a loss of momentum in infrastructure spending.
The full manufacturing picture might appear more clearly with the May reading of the Caixin manufacturing PMI to be published on Monday. That is considered a better guide to cyclical trends than the official index.
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