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January 02, 2019

China’s Manufacturing Sector Contracts in December

The news is important to the North American promotional products industry, which makes the majority of its products in Chinese factories.

By  Christopher Ruvo

A slowing domestic economy and trade war with the United States were key factors that caused China’s manufacturing sector to contract in December for the first time in about two years, analysts said.

Two closely-watched surveys released this week showed that manufacturing in the nation with the world’s second largest economy took a downturn in the final month of 2018.

The Chinese National Bureau of Statistics’ official manufacturing Purchasing Managers’ Index tallied 49.4. Readings below 50 indicate contraction. The bureau’s PMI, which focuses on the performance of large and state-owned manufacturers, came in lower than the 49.9 showing predicted by economists polled by Reuters. The reading for December was the weakest since February 2016.

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Meanwhile, the Caixin/Markit Manufacturing Purchasing Managers’ Index, a private survey that focuses on small and medium-sized manufacturers, posted a similarly weak reading of 49.7. Again, readings below 50 indicate contraction. The Caixin/Markit index was lower than the forecast of Reuters-polled analysts, who had predicted a tally of 50.1.

Both the bureau’s index and Caixin’s index were down from November, which had readings of 50 and 50.2 respectively.

According to the Caixin survey, gauges that measure new orders and new export orders retreated in December – a potential sign that more contraction is in the cards for the months ahead. Similarly, data from the Chinese National Bureau of Statistics indicated that new export orders contracted for a seventh straight month.

The readings show that “external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, a subsidiary of Caixin. “It is looking increasingly likely that the Chinese economy may come under greater downward pressure.”

Zhong wasn’t the only economist to say so. “The worst is yet to come," opined Nomura economists. "Looking ahead, we see more headwinds to growth from weakening domestic demand, the ongoing credit downcycle, a cooling property sector and lingering China-U.S. trade tensions," the economists wrote.

The contraction in Chinese manufacturing came a month after the sector stagnated, failing to expand for the first time in a couple years. December marked the third full month since President Donald Trump imposed tariffs on an additional $200 billion worth of Chinese goods.

In early December, Trump and Chinese President Xi Jinping made an agreement that kept the tariff rate on the $200 billion of imported goods at 10% in early 2019. Previously, Trump had planned to accelerate the rate to 25% at the start of this year. Some analysts viewed the agreement as a positive step toward deescalating the trade war, but U.S. tariffs remain on about $250 billion worth of Chinese imports. Still, Trump tweeted on Dec. 29 that Washington and Beijing were making progress toward a deal.

The trade battle between the world’s two largest economies is impacting the promotional products industry in the United States. As Counselor reported on here, the dispute has been a catalyst for everything from price increases to supply chain disruption.

Relatedly, executives in the stateside branded merchandise industry view the downturn in Chinese manufacturing as potentially having both positive and negative consequences for promo firms on this side of the Pacific.

For instance, partner factories that promo suppliers rely on in China could close, change into different types of production or face backlogs as a result of being overwhelmed with work gained from factories that have closed up shop. Others think Chinese factories could become more competitive on pricing to retain current customers and attract new ones.

"In theory, China's lack of manufacturing growth should be good news for the U.S. promo products industry, as it means there's more capacity, which carries lower manufacturing costs," Matt Gresge, president/CEO of Top 40 distributor AIA Corporation (asi/109480), told Counselor.