As China Rebounds, Who Buys Its Goods?

China’s government released PMI numbers for August. The official index number was 50.9, up from an unusually modest 50.7 in July. The question the figure begs is where the manufactured goods are going? It is a puzzle without a ready solution.

A quick look around the world shows that UK PMI dropped to a 26-month low in August. That is at least some sign that consumer spending in England and among its export partners is weak. Switzerland, which has been a stable and modestly expanding economy, said GDP was up only0.4% from the first to second quarter. Germany said that its manufacturing sector grew at the slowest rate in nearly two years. And, of course, most data about the U.S. economy show persist jobs trouble, as measured by ADP, a frighteningly low GDP expansion in the second quarter and persistent trouble in the housing sector.

And all of this bad news has come out in only the past two days.

China remains the low-cost manufacturing center of the world, a factor that continues to push the size of the second-largest economy higher by better than 9%, as measured by GDP growth. There is a theory that the middle class in China has grown so quickly that these consumers account for much of the demand for goods produced in their own country. Some data argue against that. Car sales in China are slow. Inflation has decreased overall consumer purchasing power. And laborers in many regions have agitated for higher wages — a sign that current wages are inadequate to pay for normal living expenses in a nation where the price of food rises in the double digits most months.

China’s PMI is probably a sign of one of two things, and each is improbable. The first is that there is a stealth recovery in the West and Japan. The second is that China has evolved into a consumer economy that looks more and more like America did through the period from the 1950s to just a few years ago.

There is a third possible explanation. China’s manufacturing is about to hit a wall and autumn numbers will show it. That may be the most likely explanation of all.

Douglas A. McIntyre