China’s economy sends new worrying signals

Good news from China is rare. The country, which has multiplied its poor economic performance in recent months, announced again on Wednesday a contraction in its manufacturing activity in August. The Purchasing Managers’ Index (PMI) came in at 49.4 points, slightly better than in July (49) and slightly above expectations (49.2). It remains below 50, a threshold that indicates an expansion of activity.

This drop is mainly explained by “unfavorable factors such as the epidemic and high temperatures,” said Zhao Qinghe of the National Bureau of Statistics (NBS).

New containment near Beijing

On the front lines of the Covid-19 epidemic, China has only recorded a handful of contaminations, but still applies very strict health restrictions. These translate into multiple confinements as soon as positive cases appear, factory closures, almost mandatory PCR tests every 72 or 48 hours or even the quarantining of any traveler who has visited a touched area.

Thus, about 4 million inhabitants around Beijing have been confined since Tuesday. And more than 13 million inhabitants of the large municipality of Tianjin, bordering the capital, had to undergo a PCR test after the occurrence of some 80 positive cases in two days.

This “Covid zero” strategy, in which the country has locked itself in, has serious economic consequences. However, he should not relax before the 20th Congress of the Chinese Communist Party (CCP), convened for next October 16. President Xi Jinping, who firmly defends this health policy, should get a third term there as secretary general of the political organization.

heat wave and drought

In addition to its health problems, China has had to cope this summer, like many countries, with scorching temperatures. Beijing has never experienced such a hot summer since its weather records began in 1961. In addition to agriculture, which suffered heavily, this heat wave caused river levels to drop and led to a drop in hydroelectric power generation. This led to electricity rationing for businesses.

Finally, Chinese activity continues to be penalized by a serious real estate crisis, with many developers heavily indebted. On Tuesday, China’s largest developer by sales, Country Garden, reported a 96% drop in first-half profit.

This sector dragged down the non-manufacturing PMI, which includes services and construction. In August, the latter was certainly in positive territory, with 52.6 points, thanks to hotels and restaurants, telecommunications and financial services, but registered a drop compared to July (53.8).

Unattainable growth target

In this context, economists no longer believe that it is possible to achieve the GDP growth target of around 5.5% this year, as the Chinese government had hoped. And this, despite the various stimulus measures announced in recent weeks.

In an unexpected move, Beijing sharply lowered several of its benchmark interest rates in hopes of giving its ailing economy a boost. “Beijing seems to put more emphasis on the execution of its policies. We could see better coordination in the future,” Citi analysts say.

Leave a Comment