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December 03, 2018

China’s Manufacturing Sector Stalls in November

It was the first time the sector didn’t record monthly growth since July 2016. Could that have implications for the promo products industry?

By  Christopher Ruvo

China’s manufacturing sector failed to expand for the first time in more than two years in November, as U.S.-imposed tariffs tightened their hold on the world’s second-largest economy.

For November, China’s Purchasing Managers Index (PMI) tallied 50, down from 50.2 in October. Readings above 50 indicate growth; below 50 equates to contraction. A reading spot-on 50 means no growth or contraction occurred.

Notably, China’s National Bureau of Statistics said the stagnation was a result of “trade frictions” with the United States and a weakening global economy. The no-growth showing came in the second full month since President Donald Trump imposed tariffs on additional $200 billion worth of Chinese goods. During a meeting in Argentina over the weekend, Trump and Chinese President Xi Jinping discussed the ongoing trade war. An agreement was made to keep the tariff rate on the imported goods at 10% come January. The rate was previously planned to accelerate to 25%. While some analysts viewed the development as a positive step toward deescalating the trade war, U.S. tariffs remain on about $250 billion worth of Chinese imports.

Meanwhile, data showed that China’s new import index, which can harbinger forthcoming demand, retreated from 47.6 in October to 47.1 in November. The new export order index ticked up, from 46.9 to 47 in November, but that was largely a result of companies hastening to ship goods to the U.S. before what they at the time believed would be the acceleration of Trump tariffs to 25% in January.

Goldman Sachs believes that China’s export growth will probably weaken over the next few months. "Unless the tariffs are rescinded in relatively short order, it's likely China's manufacturing sector may remain in low/no growth mode in the near term," Matt Gresge, president/CEO of Top 40 distributor AIA Corporation (asi/109480), told Counselor.

Even more broadly, analysts like Oanda Asia-Pacific’s Stephen Innes think China’s PMI nearing contraction adds evidence to the growing case that a global economic slowdown is near. "If China is sputtering, it most likely is related to weaker orders from the U.S.," Jordy Gamson, CEO of Atlanta-based The Icebox (asi/229395), told Counselor. "This hopefully is not the beginning of a U.S. slowdown, but if it is, the promo industry will not be immune." 

Some leading economic and political analysts in China have said that Beijing should prepare for a drawn-out trade war with the U.S. “We shouldn’t and can’t accept the U.S. imposed terms for a ‘ceasefire.’ The trade war won’t end in two or three years and we should make long-term mental preparations,” Pei Changhong, former director of the Institute of Economics at the Chinese Academy of Social Sciences, a government think tank, was quoted as saying by the South China Morning Post.

The trade conflict that’s hurting China’s manufacturing sector is impacting business in the United States, too. The domestic promotional products industry, which has the overwhelming majority of its goods produced in China, is not immune – as Counselor reported on extensively here.

Come 2019, Trump tariffs are poised to trigger far-reaching product price increases and supply chain disruption in the promo products space. Destabilized annual pricing and catalog confusion, thinner margins, possible diminished sales, and a potential shift in some end-client spend toward so-called “budget items” and products manufactured outside China are also possible repercussions from the trade war, leading industry executives have said.

While promo suppliers have said that the tariffs are driving supply chain diversification that will see more goods produced outside China, that shift takes time. Plus, as American importers in promo and other industries steer production away from China and as the economy there potentially stumbles, there could be a negative ricochet effect back to North America.

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. “If suppliers don’t have enough time to move their supply chains, it could result in a shortage of factory capacity to produce some of the products we sell here,” said Jonathan Isaacson, president of Top 40 supplier Gemline (asi/56070).

Still, others see potential positives for stateside companies in the challenges Chinese manufacturers are facing. "My hope is that some Chinese manufacturing has moved to other countries, which should only make Chinese factories more competitive to keep their customers from going elsewhere," said Gamson.  

Gresge expressed a similar view. "In theory, China's lack of manufacturing growth should be good news for the US promo products industry, as it means there's more capacity, which carries lower manufacturing costs," he told Counselor. However, Gresge added, U.S. "tariffs are the wildcard. The tariffs are a strong disincentive to manufacture in China, which negates the benefits of greater capacity and lower manufacturing costs.  Net/net, it's hard to predict which way it will go. We shall see."