China Manufacturing Brightens As Global Recession Looms

September 1, 2010 by Douglas A. McIntyre

China manufacturing picked up in August, shaking off a slow period that began more than a year ago. The China Federation of Logistics & Purchasing said its purchasing managers index rose to 51.7 from 51.2 in July. Another report from HSBC showed an improvement of 51.9 from 49.4 for the same period.

The data raise two issues. The first is whether the People’s Republic can ward off inflation, some of it caused by the demand by factory workers for higher wages. China may be tempted to support this movement because it needs to create a larger middle class to consume its own goods. The resulting increase in consumer spending could offset slow demand abroad.

China faces a trade-off which is not attractive on either side–rising prices or adding millions of people who were once in rural poverty to a consumer class which lives in China’s large cities.

The other issue is whether China can possibly maintain its growth in the face of the rapidly decelerating economies in the West and in Japan. The evidence has grown recently that unemployment and a weak housing market have dragged the American economy back toward recession. Austerity budgets and an increase in taxes in many EU nations, and Japan threaten to undermine any growth in imports.

The PMI report may make China’s own GDP future look bright. That could be the case short-term, but the rest of the year and 2011 will be another matter.

Douglas A. McIntyre