There have been a number of convincing arguments that China will be spared the recession that has begun to spread across the world — or, by the recession that never ended but has begun to grow anew. The theory that China’s economy is isolated enough to expand at 9% while the rest of the world drags along at 4% has deep flaws. New PMI data from the People’s Republic signal exactly how flawed the expansion assumption is. September’s number was 49.9. A figure of 50 is a signal of growth. China’s PMI has now been weak for three consecutive months.
The optimism about China’s economy is based on at least three things. The first is that its emerging middle class is large enough to consume much of what China’s factories make. This middle class is relatively new and expanding as more people in the country move from rural areas to the large cities where production is centered. However, Chinese consumers are hobbled by their propensity to save and by inflation rates the undermine their purchasing power.
The second theory about China’s financial health is that its ability to control the value of its currency will keep its exports attractive. The period when that is true may have started to end. Developing nations like Brazil have aggressively attacked China’s currency policies. It would not be beneath these countries to erect trade barriers to make their points. In the U.S., Congress has a bill pending that would label China as a currency manipulator. China would face sanctions if the American government took that stance officially.
The third theory about China’s growth is that developed nations with slow GDPs and those that are still growing will need China’s finished goods because no other nation can muster the size of its factory output. China’s position as the world’s preeminent manufacturer may be unquestionable, but a deep recession would touch even countries like India and Brazil, which are in periods of economic hypergrowth.
The slowdown in China has started. It is hard to say what would constitute a recession in a country were 9% expansion is the norm. Perhaps 4% or 5% would “feel” like a recession in China. And, it is certainly possible that the world could pull China in that direction soon.
Douglas A. McIntyre