Many eyes are on China now, particularly since the country’s economic activity has been slowing down over the past month. The country reported Tuesday that the manufacturing Purchasing Managers’ Index has not been as hoped for. On Tuesday, China reported official figures showing that its PMI for October was just 51.6. This is not disastrous since any reading of over 50 indicates growth.
However, it was lower than expected, or what was desired, and it was just 98.6% of last month’s figure. This may not seem much of a drop, but in financial terms it is a larger drop than analysts had expected. A Reuters’ poll came up with an expected figure of 52.0 compared with the 52.4 of the previous month (September). , The actual PMI of 51.6 was certainly unexpected.
Why a Drop in the Chinese Economy?
There were mitigating circumstances that may have explained at least a part of the reason for this drop in economic activity. There was the week-long public holiday in China, resulting in a reduction in both demand and production. The drop in excess capacity and pollution also had a negative effect on industrial activity.
According to Julian Evans-Pritchard, Capital Economics China economist, lower investment spending in response to a credit growth slowdown has an effect on economic activity. So too have recent disruptions in industrial activity in the northeast of the country.
Chinese Growth Due to Expansion of Credit?
However, this is not necessarily a bad thing. Paul Gruenwald, the S&P Global Ratings Asia Pacific chief economist, commented that the economy in China has been growing on credit too fast of such growth is not a good thing for any country.
The expansion of credit in any country should grow in line with the growth of the GDP of that country. He went on to say that real growth has to drop to 5.5% in order for the expansion of credit to come into line with growth in GDP.
Chinese Manufacturing Growth and the Chinese Economy
According to Chinese Premier, Li Keqiang, China is looking for a figure of around 6.5% economic growth in 2017. Due to spending on Chinese infrastructure, and a recovery in weak in export figures, manufacturing has seen some genuine growth. This has gone some way in providing more confidence in the Chinese economy perhaps misplaced?
Caixin/Markit are due to release their data on the Chinese economy on Wednesday. This may be more optimistic, although the Caixin/Markit figures tend to reflect the position of small and mid-sized manufacturers.
