Lagarde made her comments in Indonesia in an address titled “Poised for Take-Off — Unleashing Indonesia’s Economic Potential,” in which her main focus was the future of the local economy. However, part way through her speech, she said:
Other emerging economies, including Indonesia, need to be vigilant to handle potential spillovers from China’s slowdown and tightening of global financial conditions.
Lagarde did not have to wait long to get more evidence. The Caixin PMI Index release said:
Chinese manufacturers saw their operating conditions deteriorate between July and August at the fastest rate seen in more than six years, according to the latest Caixin China Manufacturing Purchasing Managers’ Index released Tuesday.
The August manufacturing PMI of 47.3 represented a slight increase from a preliminary flash reading of 47.1 posted earlier in the month. But it was down from 47.8 in July.
August thus marked the sixth, successive month in which the index came in below the 50-point mark, the dividing point between business growth and contraction among the companies surveyed.
There are several well-articulated reasons that the Chinese economy has dropped toward what might be considered a recession, given such powerful advances in gross domestic product for years. The first of these is that the central government hid the correct numbers to make it appear that China was still healthy. Another is that the central government’s efforts to entice the private sector toward being self-supporting have failed. Another theory is that China’s cheap labor is not as attractive for manufacturers as cheaper labor in places like Vietnam and Mexico.
No matter what the reason, the Chinese government has started to scramble to support its stock market and what seems to be a sharp dive in the fortunes of its flagging private sector. Unless those efforts take hold soon, the IMF view is right.