China Economic Trouble Looms as PMI Falls

The HSBC measure of China’s PMI for June showed that the nation’s manufacturing sector slowed again, and may be in for a period of deep trouble.

The drop in the index created a string of eight consecutive months of dips as the measurement moved to 48.1 on a scale that marks 50 and above as expansion.

The drop raises the issue of what constitutes a recession in China. The traditional measure around the world is a contraction of gross domestic product for two consecutive months. China’s economy has been white hot for a decade, with GDP increase of 10% or better most years. Based on that level of expansion, both China’s factories and its middle class consumers may have entered a time that they perceive as economic trouble if GDP drops to an expansion level of 6% or 7%.

China’s factory economy was built with infrastructure and a labor force size, with a foundation of a massive and growing export market. With many of the nations in Europe in traditional recessions and the U.S. economy cooling, the demand for China’s exports has already faltered. The trend in the West will only worsen in coming months.

China’s consumer population has moved from one of saving to one of use of earnings for the purchase of goods and services. Much of China’s GDP is based on this internal consumer activity. The double blow of a slowdown in purchasing activity among the nation’s middle class and a slackening of external demand could be devastating. And China’s consumers will balk at parting with money if they believe that their jobs, or at least a continuing increases wages, are in jeopardy.

It has been unthinkable until recently that the expansion of China’s GDP could drop much below 8%, particularly given the fire power the central government can muster for stimulus. But no injection of capital into the economy can completely overcome a sharp contraction of global consumption among individuals and business enterprises.

Douglas A. McIntyre

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