Analysts warn of worse to come next year with export orders likely to slump as a result of "front loading" happening now.
This story is being published by POLITICO as part of a content partnership with the South China Morning Post. It originally appeared on scmp.com on Oct. 31,2018.
China’s economy appears to be slowing faster than expected at the start of the fourth quarter, a bad omen for growth early next year when the full force of the trade war with the United States comes to bear.
This situation is likely to spur Beijing to introduce new measures to support growth, analysts said. The government will try to avoid returning to its battle-tested plan of large-scale monetary and fiscal stimulus so as not to exacerbate the country’s already huge stock of debt, but it may have no choice but to move some way in that direction to stabilize growth.
Business sentiment in both the manufacturing and non-manufacturing sectors was weaker than expected in October, led by sharp declines in export demand, according to the official purchasing managers’ index published on Wednesday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing.
The figures were the first gauges of the trade war’s impact since the U. S. levied 10 percent tariffs on $200 billion worth of Chinese goods in late September.
The manufacturing sentiment index dropped to 50.2 in October, from 50.8 a month earlier. The reading, which was its lowest in more than two years and barely above the 50 point line that separates expansion from contraction in the sector, suggests the possibility of contraction in November as the U. S. tariffs take effect.
That situation could worsen in January, when the tariff on the $200 billion of Chinese imports is set to rise to 25 percent.
It might also be exacerbated by the “front loading” behavior of many Chinese exporters — boosting production and shipments now to fill orders for early next year before the scheduled tariff rate increase. Production and unemployment among export manufacturers are at risk of falling sharply from January due to lack of orders to fill, analysts said.
New export orders contracted for the fifth month in a row in October, to 46.9 from 48 in September. Imports also contracted for a fourth straight month, indicating weakening demand within China, while the decline in manufacturing employment accelerated.
Non-manufacturing activity, dominated by the service sector, also slowed in October, with the index dropping a full point to 53.9. While the index still indicates a healthy level of activity, the size of the drop could be a sign of a sharp slowdown ahead.
