China’s PMI and Trade Troubles — Chicken or Egg?

Have China’s sluggish trade and PMI been caused by trouble in Europe and the U.S. economies, or did a possible year-long slowdown of China consumer confidence hurt export activity from the developed world to the People’s Republic? Expectations of slowing wage increases and lower jobs growth in China may have curbed the advance of the buying activity of its huge middle class.

China’s PMI is measured primarily based on two figures. The first is from China’s own National Bureau of Statistics, which reported a September PMI of 49.8 , up from 49.2. The HSBC and Markit alternative figure for PMI in the same period showed a drop.

It is widely assumed that the largest single factor in China’s manufacturing softness is the recession that has run across almost all of Europe. Relatively large economies like Italy and Spain almost certainly have slowed enough to hurt imports from everywhere, including from their neighbors and the United States. China is also a member of that group.

The United States in turn has counted on exports to lift its manufacturing sector. That has become less likely over the past several months. Some economists assume that this lower activity among U.S. exporters has slowed imports of China’s finished goods to America because business and consumer confidence here have disintegrated. The circle goes around and around, and become progressively more confusing.

Lost in the analysis is whether China’s massive middle class, which numbers as high as 250 million, saw a slowdown coming. At some point this group realized inflation in the People’s Republic had slowed, a signal that factory activity was no longer overheated. Property values, once skyrocketing by the month, no longer rose. Factories and export company activity likely faltered many months ago, before People’s Republic official data began to demonstrate it.

Many of China’s workers have become restless in the past several months. The extent of this is shielded by the government’s control of the media. But some analysts believe that the restlessness has been caused by worry about pay and job security, which have each been solid for many years.

Demand for goods and services by China consumers almost certainly began to slow to walk some time ago, lessening demand for foreign goods.

China’s own middle class may be among the original cause for the slow trade that has hit many of the world’s largest economies.

Douglas A. McIntyre