THE LATEST PURCHASING managers’ index (PMI) shows the blow that power shortages have landed on China’s manufacturers.
September’s PMI indicates that manufacturing activity contracted for the first time since the beginning of the pandemic. At 49.6, the index was below the 50-point dividing line between contraction from expansion. February 2020 was the last time the PMI had dropped below 50.
Power shortages are not the only reason for manufacturing’s slowdown. The economy has been slowing for much of the year, and sporadic outbreaks of the Delta variant causing localised lockdowns have been disruptive. There is now also the property market crisis, of which Evergrande is the most visible sign, and the measures being taken against some business sectors in the name of promoting ‘common prosperity’.
The question for authorities now is whether the official September PMI heralds a slowdown of fourth-quarter GDP growth that will be sufficiently sharp to require remedial stimulus, which would conflict with the drive to deleverage the economy.
The signals are ambiguous. September’s services PMI rose, to 53.2, after contracting to 47.5 in August. The Caixin China General Manufacturing PMI, which is more reflective of conditions in smaller and medium-sized and non-state businesses, also rose in September after contracting in August for the first time since April 2020. Nonetheless, September’s reading, taken earlier in the month than the official PMI, only recovered to 50.
Private-sector economists such as Goldman Sachs and Nomura have recently cut their forecasts for full-year growth to less than 8% based on the weakening economy in the second half. That would still leave plenty of leeway to hit the official target of at least 6% GDP growth. Whether that narrows will turn on the capacity of the central government to manage the power crisis and the Evergrande bailout.