China slowdown hits global stocks again
Service-sector expansion suggest things may not be so bad after all
China was once again the culprit as global equity markets sharply sold off on Tuesday.
This time it was a measure of the country’s manufacturing and industrial activity that confirmed what the world already knows: things are slowing down in the world’s second-largest economy. But there are signs that conditions are not as bad as feared as China transitions to a consumer- and serviceoriented economy.
The soft purchasing managers index numbers, which slipped into contraction territory below 50 to 49.7, were actually in line with expectations. But the private Caixin PMI, which focuses more on smaller manufacturers, was revised lower to 47.1 from 47.3.
As a result, the pullback in Asian stocks (Japan’s Nikkei was down 3.8 per cent, Hong Kong’s Hang Seng declined 2.2 per cent and the Shanghai Composite Index dropped 1.3 per cent) carried over into Europe, where the Stoxx Europe 600 Index fell 2.5 per cent, as manufacturing numbers there also fell short of expectations. As has been the case in recent weeks, the selling spread to North American markets, with Canada’s S&P/TSX composite index down 2.7 per cent to 13,481.9 and the S&P 500 off almost three per cent to 1,913.85.
“A large part of that slowdown is deliberate — China has clearly indicated that it will transition away from its manufacturing-based, investment-led model of growth, towards a servicesbased, consumption-led model,” said Derek Holt, an economist at Scotiabank.
“However, the speed of deceleration suggested by the private PMI reading is probably more abrupt than officials had hoped for and likely implies further targeted stimulus to provide support.”
China’s services PMIs, which are still expanding, also decelerated in August. This is a less understood part of China’s growth story, but one that is of growing importance. The country’s service sector has expanded to make up a larger share of the economy than manufacturing in recent years.
Holt noted that the services sector accounted for 50 per cent of the Chinese economy in the second quarter, compared to 43 per cent for manufacturing.
“In other words, miss what’s happening to China’s service sector and you miss half the country’s growth dynamics,” he said.
But the slower expansion in services has not been able to offset manufacturing’s weakness.
Barclays economist Jian Chang is forecasting another 25-basis-point reduction in benchmark rates in the fourth quarter due to weaker-thanexpected growth, and two 50-point reserve requirement ratio cuts for banks in the fourth quarter in anticipation of persistent capital outflows.
She noted that China’s summer weakness could be linked to the recent Tianjin port explosion and largescale factory closures in Beijing ahead of the Second World War victory day parade on Sept. 3, but the multi- year low PMI confirms that the country’s economy is not yet on solid footing.
“As the economy still faces strong headwinds from excess capacity in many industries, oversupply in the housing market, high debt burdens (especially among local governments), we expect the risks to growth to remain to the downside throughout 2016,” Chang said.
Slowing industrial sectors such as energy and mining have had a particularly negative impact on power output, where growth has been flat. But the broader industrial landscape appears much more promising. The latest round of earnings demonstrated growth for the sector, and the same goes for all-important consumption trends.
Despite fears of a hard landing for the Chinese economy, its consumers appear to be driving more, travelling more, and enjoying more leisure time.