One of the most disheartening economic news out this week was to learn that China’s manufacturing activity weakened further in June, falling to a nine-month low as demand fell, according to a preliminary survey by HSBC. The bank’s Purchasing Managers’ Index (PMI) declined to 48.3, from May’s reading of 49.2. A reading below 50 indicates a contraction.
Why is this so important to us? Well the health of the Chinese economy, the world’s second largest, is crucial as to the state of the world economy and along with the US remains the most likely to pull the rest us out of the global malaise.
Last week, the World Bank lowered its 2013 growth forecast for China. The bank now expects the China to grow 7.7% this year, down from its earlier projection of 8.4%. Whilst this may seem massive compared to the UK’s paltry 0.3% expansion in the first three months of the year, by Chinese terms this is a huge drop.
Among the concerns cited by analysts have been fears that a protracted slowdown in key markets such as the US and Europe may hurt demand for Chinese exports and impact its manufacturing sector.
And so this is a depressing cycle. A drop in European and American demand for Chinese goods hits the Chinese economy which in turn has an impact on global trade.
So where does this lead us? Hopefully these statistics are just a blip and China will retain a respectable amount of growth, by its standards, this year. However maybe this will provoke Beijing to take some steps to try and sustain growth rate by easing monetary conditions shortly and cutting the amount of money that banks are required to keep in reserve ( the ‘reserve ratio requirement’). This could boost lending in the country and have a knock on effect on manufacturing.
Maybe the recent slowdown in inflation has given more room to policymakers to take such measures.
Watch this space.