Even in the Caixin data, however, there was a disconcerting indicator of weakness ahead, with new export orders falling for the first time in eight months.
It’s not just that there is growing fuss in the US and Europe about the rising tide of cheap exports pouring out of China’s vast manufacturing base.
Xi has offered subsidies and cheap credit in high-tech sectors he wants China to dominate, such as electric vehicles.Credit: Bloomberg
The US economy, which has been growing more strongly than other developed economies, appears to be slowing, and the eurozone economies are still posting modestly positive growth figures, so foreign demand is weakening.
The data also shows that both input costs and selling prices from manufacturers have fallen, which fits the narrative that China’s manufacturing base is loaded with overcapacity, leading to markdowns and price deflation factory and, given the background of weak domestic demand, the redirection of production to export markets.
There were signs in the headline numbers that Xi’s efforts to reposition China’s manufacturing base are having an early effect.
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As he tries to cling to the old, high-volume, relatively low-cost industrial activities that have fueled China’s growth for decades, Xi has given subsidies and cheap credit to high-tech sectors he wants China to dominate, such as would be electric vehicles, semiconductors, artificial intelligence, aviation and green energy.
Sub-indices in the PMI data showed that the high-tech manufacturing index rose from 49.4 in July to 51.7 in August.
More sophisticated technologies are a key frontrunner in Xi’s long-term economic strategies, but China is facing pushback from the US, Europe and other economies.
The US has cut off China’s access to advanced semiconductors vital to most new technologies and urged its allies to join.
The US, Europe and Canada have imposed tariffs on electric vehicles made in China; US and Canada raise tariffs on Chinese steel and aluminum; and Europe has a number of ongoing investigations into other Chinese exports, including investigations into China’s exports of solar panels and wind turbines.
The specter of Donald Trump also looms over Xi’s strategy, given that he has pledged — if he returns to the White House — to impose tariffs of 60 percent on all Chinese imports (along with a base tariff of 10 percent on all other imports).
Xi’s high-tech, export-led plans for his economic future would collapse if the nation is shut out of major global markets.
While there have been modest, rather ad hoc measures to try to stimulate the domestic economy, Xi does not appear to have a plan B.
He has resisted the major stimulus programs that outside economists have called for in the post-pandemic years, apparently because he views any large-scale government spending to stimulate consumption as wasteful.
The wealth effects of China’s housing implosion – now in its third year – have undermined consumer confidence and household spending and continue to be a drag on economic activity and growth.
China’s real estate sector continues to sink.Credit: Getty
It also destabilized the finances of overburdened local governments, which were dependent on land sales and property income for their income.
While Beijing raises most of China’s government revenue, it is those local governments that do most of the spending and provide community services.
As the real estate sector continues to slump – the value of new home sales (in data provided by China’s top 100 real estate companies) fell nearly 27 percent in August from a year earlier, an acceleration from a 19 .7% since July – local governments need the help their party leaders promised at the “third plenary” earlier this year.
In plenary, party officials pledged to give them more “autonomous fiscal capacity”, allowing them to earn more of their own income.
If Trump were to win the presidential election in November and impose his trade policies, the prospect of a global trade war would overwhelm any discussion of whether China’s GDP growth rate this year will be a 5 or a 4.
They also decided to establish a “long-term mechanism” to tackle unsustainable levels of debt in local authority funding and to allow local authorities to raise more funds directly by issuing special bonds.
It would also help if Beijing gave them a larger share of the revenue they earn.
Struggling and over-indebted local authorities, whose income from land sales has fallen by a further 20%-plus in the past year, forcing spending cuts, are a choke point on the domestic economy.
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Authorities in Beijing have tried a number of relatively small-scale measures to try to stem the decline in the housing market, and are reportedly weighing another one, considering allowing homeowners to refinance their mortgages to -reduces borrowing costs.
Effectively, that would transfer value and cash from banks to homeowners. Whether it would have any material effect on consumption and growth is doubtful, given that households, having seen their property wealth devastated, are in deeply defensive mode.
Absent a large-scale stimulus program or an unexpected and significant reversal of the housing sector’s decline, Western economists believe China will struggle to meet this year’s economic growth target of “around 5 percent” and that growth next year. he will be even more submissive.
Its slowdown is obviously not good news for a region including Australia, which is fueling China’s growth, or for the global economy if the other major economic power, the US, also slows.
If Trump were to win the November presidential election and impose his trade policies, of course the prospect of a global trade war would overwhelm any discussion of whether China’s GDP growth rate this year will be a 5 or a 4 ahead.
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