China’s manufacturing economy contracted in December, a rare occurrence in the largest manufacturing nation in the world. Economists have started to debate whether trade tensions with the United States are the cause and whether the situation will worsen, a threat to the overall Chinese gross domestic product (GDP) expansion.

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According to the carefully followed Caixin China General Manufacturing PMI report:

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – fell from 50.2 in November to 49.7 at the end of 2018, to signal a renewed deterioration in overall operating conditions. Though only slight, it was the first time that the health of the sector worsened since May 2017.

Any number below 50 is a sign of a contraction of the sector.

Some experts believe that the bad news has been triggered by tariffs the Trump administration has put on about $200 million in goods. Most of these tariffs are 10% but are scheduled to rise to as much as 25% in a few weeks. The administration has waffled on whether the 25% figure will go into effect. Trump and Chinese President Xi Jinping say trade talks have taken a positive direction in recent days.

Caixin economist stated that the problem may worsen:

In general, China’s manufacturing sector faced weakening domestic demand and subdued external demand in December. Companies had a stronger intention to destock and prices of industrial products were declining, which could further drag on production. It is looking increasingly likely that the Chinese economy may come under greater downward pressure.

If there is no resolution to trade tensions between the United States and China, demand problems could hit China’s GDP growth, which has been close to 7% since the Great Recession.

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