As recently as April, the signs were flashing that China’s economy was starting to cool off. With the consumer price index (CPI) down -0.1%, consumers are understandably a bit gun-shy amid mounting trade concerns. Even with the manufacturing sector contracting, the results exceeded expectations. Capacity utilization increased by 6.1% on an annual basis but this was a drop from March’s stellar 7.7% gain.
Lynn Song is chief economist for Greater China at ING Economics. Finally, she underscored that pessimism and uncertainty surrounding tariffs have an outsized effect on consumers’ buying behavior. Other measures show that would-be buyers sat on the sidelines in April, helping to fuel the broader economic slowdown.
International trade disputes with the U.S. and other trading partners are forcing Beijing’s hand. Consequently, stabilizing the housing market and ensuring a continued economic recovery has proved more challenging. In a sign of waning confidence, property investments fell 10.3% year-on-year between January and April. This drop is a reminder of the pain still felt in this essential industry.
Beijing is facing increased criticism from all of its trading partners for their heavy use of exports as a means to work off excess industrial capacity. The central government announced a 4% increase in fixed asset investment in factories and equipment in April. This demonstrates strong capital expenditure resilience, even in the face of external cost pressures.
Retail sales surprise to downside. They’re up just 5.1% over the past year, well below economists’ predictions of 6%. This trend reflects the fact that Chinese consumers have been gun shy about spending after a years long squeeze from the bust of the housing market.
“Establishing a trough on a national level is taking some time, as the recovery of the property market remains uneven and gradual. It’s possible that tariff-related pessimism and uncertainty kept more buyers on the sidelines in April.” – Lynn Song
The Chinese government has already begun to intervene against these negative economic indicators. Yet it has reasserted its credibility by recommitting itself to promoting job creation and stimulating domestic demand. Fu Linghui, the spokesperson for China’s National Bureau of Statistics, recognized these recovery signals. He did emphasize that external factors still remain a big worry.
Fu stressed the need to advocate for a just rebound of rates. Tight margin overall price levels create a burden on production and business management, which in turn creates a burden on jobs and income.
As difficult as the last year has been for the China watch, there’s reason for cautious optimism about the future of China’s manufacturing sector. As Louise Loo of Oxford Economics recently noted, a sustained China manufacturing competitiveness export shock might continue to boost gains. She warned these improvements have a deflationary price.
“It should also be noted that there are still many outside unstable and uncertain factors, and the foundation for the continued recovery and improvement of the national economy needs to be further consolidated.” – Fu Linghui
Additionally, Fu emphasized the importance of promoting a reasonable recovery of prices as low overall price levels put pressure on production and business operations, affecting jobs and incomes.
Despite the challenges posed by trade tensions, there is cautious optimism regarding China’s manufacturing sector. Louise Loo from Oxford Economics noted that export-driven gains might continue due to China’s manufacturing competitiveness, although these gains come with deflationary costs.
“Export-driven gains in factory output could continue given China’s manufacturing competitiveness and frontloaded orders before the end of the 90-day truce, but this is coming at a persistent deflationary cost.” – Louise Loo
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