Is China’s Manufacturing Sector Headed Toward Recession?

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Part of a nation’s economy can’t go into recession, by definition. However, a huge sector of China’s economy appears ready to hit negative growth (an odd term for contraction). The new Caixin China General Manufacturing PMI for August registered 50.6. A number of 50 means growth is neutral. Below that, this part of China’s economy is essentially in recession.

The new report from research firm Markit says:

Confidence towards future output remained stuck near June’s six-month low, with a number of panellists citing concerns over the impact of the ongoing China-US trade war and relatively subdued market conditions. 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 – posted above the neutral 50.0 level at 50.6 in August. However, this was down from 50.8 in July and signalled the weakest improvement in the health of the sector since June 2017

The trade war problem could expand rapidly and severely if tensions between the United States and China continue. This could result in tariffs into the hundreds of billions of dollars. China’s factory sector accounts for a large portion of exports to the United States. Tariffs would batter it significantly.

A big fall-off in manufacturing would badly dent the prospects of China’s middle class, which has accounted for an important part of GDP growth. The Chinese government claims this group is over 400 million people. An erosion of its purchasing power, or layoffs, could tilt China’s economy downward.

If the PMI figure drops below 50, the Chinese government may have a problem it cannot solve as long as tensions with the United States don’t get better.