China's Economic Warning Lights 'Flicker'... August PMI Hits Lowest Since February Last Year (Comprehensive)

Delta Variant Virus Spread, International Raw Material Price Increase, Direct Impact of Floods
Possibility of Economic Management Shift to Consumption and Investment in the Second Half of the Year

[Asia Economy Beijing=Special Correspondent Jo Young-shin] China's manufacturing Purchasing Managers' Index (PMI) for August showed the lowest level since February last year. Although the resurgence of COVID-19 and flood damage were reflected, there is also analysis that the Chinese economy is cooling faster than initially expected.

◆ Signs of abnormality in China's growth engine = The National Bureau of Statistics of China announced on the 31st that the PMI index for August recorded 50.1, lower than July's 50.4. This is the lowest level in 18 months since February last year. The manufacturing PMI has been declining for five consecutive months since peaking at 51.9 in March.

The manufacturing PMI is an indicator showing economic trends; a baseline above 50 indicates economic expansion, while below 50 indicates contraction.

The non-manufacturing PMI, which reflects service sector trends, recorded 47.5, down from 53.3 the previous month, falling below the baseline of 50. Accordingly, the composite PMI recorded 48.9, entering an economic contraction phase for the first time since March last year.

◆ Clear trend of high first half and low second half in China's economy = The slowdown in China's economic growth was already anticipated. When the pandemic broke out in January last year, China's first-quarter GDP recorded a negative 6.8%. The Chinese economy achieved a 'V'-shaped rebound in the second quarter with 3.2% growth, followed by 4.9% and 6.5% growth in the third and fourth quarters, respectively. As the year progresses, the base effect is offset, and the dominant forecast is that China's economic growth rate will slow down.

In fact, China's economy grew by 18.3% and 7.9% in the first and second quarters of this year, respectively. The general consensus is that the third quarter will be lower than the second, and the fourth quarter lower than the third. The August PMI is also analyzed as showing the directional trend of China's economy with a high first half and low second half.

[Image source=Yonhap News]

◆ Rapid slowdown vs. unexpected variables = There are three main reasons for the decline in China's manufacturing and non-manufacturing PMI in August. The rapid spread of the COVID-19 Delta variant, rising international raw material prices, and unexpected variables such as flood damage caused by heavy rain led to a rapid decline in manufacturing and non-manufacturing PMI.

Chinese economic media Caixin analyzed that the decline in the PMI index in August was due to the weakening expansion of the Chinese economy caused by the pandemic and floods. It also noted that the decline was significant in industries with high energy consumption such as steel, and evaluated that rising international raw material prices pulled down the PMI. It added that unexpected variables increased the number of companies under cost pressure, accelerating the pace of economic slowdown. Regarding consumption, it was evaluated optimistically due to the upcoming Mid-Autumn Festival holiday in September and National Day holiday in October.

◆ China responding to economic slowdown = Chinese Premier Li Keqiang stated at the State Council executive meeting held on the 16th that domestic and international environments are complex due to abnormal weather such as floods, the resurgence of COVID-19, and rising international raw material prices, emphasizing the need for fiscal and monetary policies. This is interpreted as meaning that fiscal and monetary policies can be re-implemented depending on market conditions.

Following Premier Li's remarks, there is speculation within China that the financial authorities may cut the reserve requirement ratio (RRR) as early as the end of September or at the latest in the fourth quarter. The People's Bank of China, the central bank, lowered the RRR by 0.5 percentage points on the 15th of last month. After the RRR cut, Chinese financial institutions secured 1 trillion yuan (approximately 177 trillion KRW) in funds and released them into the market.

It is also possible that the Chinese government may shift its economic operation direction from export and manufacturing production-centered in the first half to consumption and investment. This is highly likely as it aligns with the dual circulation policy. Premier Li's emphasis on the employment multiplier effect at the State Council meeting is also interpreted as a preemptive measure aimed at expanding domestic demand in the second half of the year.

This content was produced with the assistance of AI translation services.