A China Slowdown Just When It's Needed

China’s PMI growth dropped to the lowest level in three quarters. The government’s Purchasing Managers Index fell to 52 compared from 52.9 in April, according to the National Bureau of Statistics.  The slowdown happens to coincide with the early signs of another recession in Japan, the EU and US. That means that China may have gotten lucky in a perverse kind of way.

China’s factory activity most likely tapered off because money access in the People’s Republic has been restricted to fight inflation. An increase in the cost of raw goods may also have caused China manufactures to cut production because the higher prices cannot be passed on to trading partners like the US. The inflation problem is worsening as workers agitate for better pay.

China may have found that, if PMI has stayed unusually strong, that its export goods levels would add to inventories of finished product stuck in supply chains and in Chinese ports. New housing and employment data from the US show the economy has slowed and second quarter GDP growth may be no better than 2%. The financial crisis in Europe and the austerity measures the have some with them have almost certainly hurt consumer expenditures. The same pattern of consumer activity has set in for Japan, although the prime cause for the slowdown there is the earthquake.

China’s factory activity can never be perfectly matched to overseas demand. The amount of data which would be needed to do this is colossal and cannot be had in real-time. This leaves China with an imperfect system which will build inventories from factories too quickly in some cases. It will cause shortages when demand falters.

For now, that is precisely what is happening. China’s manufacturing has been curtailed because of capital availability and inflation that the demand in the West has faltered.

Douglas A. McIntyre