On the eve of the high-stakes meeting between US President Donald Trump and Chinese President Xi Jinping, new data showed that the Chinese economy slowed further in November, leaving the manufacturing sector on the brink of contraction.
The official composite Purchasing Managers’ Index (PMI), which measures sentiment among Chinese manufacturing and service sector firms, fell to 52.8 in November from 53.1 in October, the National Bureau of Statistics said. The November level was the lowest since the composite series began in January 2017.
Manufacturing growth came to a halt in November, with the index falling to 50.0 from 50.2 in October. The November index was exactly at the watershed point between expansion and contraction in the sector and was the lowest since it came in at 49.9 in July 2016. The decline was unexpected. The median forecast in a Bloomberg survey had predicted an unchanged reading of 50.2.
Yu Fenghui, an adjunct professor of Huazhong University of Science and Technology, questioned whether the situation in the Chinese manufacturing sector might be worse than the data showed.
“I’m just wondering if the result of November PMI was rounded up to the 50 mark,” he wrote in a blog post. “We cannot deny that economic winter has already come, the data are here.”
Activity among non-manufacturing firms, mostly service sector companies, also slowed, with the index falling to 53.4 from 53.9 the month before. The November index was the lowest since 53.1 in May 2016, and was also lower than expected, with Bloomberg’s survey forecasting a small drop to 53.8.
Combined with weaker sentiment data in October, the November numbers suggest a further slowing of Chinese growth in the fourth quarter from the 6.5 per cent posted in the third quarter.
Analysts expected growth to slow significantly in the first half of 2019 when the full impact of US tariffs hits the Chinese economy.
China’s economic growth was likely to weaken further in the coming months, even if the meeting between Trump and Xi results in a trade ceasefire, Capital Economics, a London-based consultancy, wrote in its latest note.
In response, China can be expected to implement further economic stimulus measures.
“We except more policy easing or stimulus to be launched once more signs of a significant slowdown emerge,” Lu Ting, chief China economist at Nomura International in Hong Kong, wrote in a research note.
“[China’s] new export orders will continue to contract as long as the trade war continues, not to mention if trade tensions escalate after the meeting between President Xi and President Trump,” Iris
Pang, Greater China economist at ING Bank, said in a research note. The Chinese government might react by cutting import tariffs on more goods to reduce the production costs in the manufacturing sector, she said.
The weaker economic figures were published the day before Xi and Trump were due to meet in Buenos Aires after the G20 leaders’ summit.
Analysts generally agree that the leaders will not be able to fully resolve the trade war at their meeting, but they could agree to a “ceasefire” that postpones tariff increases set to take effect on January 1 while agreeing to further negotiations in the near term, perhaps based on an outline agreed at Saturday’s meeting.
Failure to make progress and a further increase in tariffs by the US could risk a global recession, some analysts have warned.
“[The result of the November PMI] could affect China’s negotiation strategy in the trade talks,” Shen Jianguang, chief economist at JD Finance, told the South China Morning Post. “The Chinese economy is now facing great downturn pressure.
“It is urgent to reach an agreement and avoid a further escalation of the trade war.”
The key now was whether China can speed up implementation of reform and opening of its economy, Shen added.
The consensus is that China will sit down on Saturday in a weaker economic position. However, most analysts agree that neither side has much to gain from prolonging the conflict.
“China’s in a much weaker position, but that does not mean the US is in a strong position,” said Richard Duncan, an independent economist and publisher of the video-newsletter Macro Watch, before the release of the November PMI data.
“Its economy could also be thrown into a very severe crisis through a [prolonged] trade war with China, while China’s economy could completely implode.”