• Alexander Liu-Middleton

China's production position deteriorates as trade war reignites

THE perceived future for China's manufacturing segment worsened more than expected in May, as feebleness in the domestic economy combined with intensification in the trade deadlock with the US.

The industrial purchasing managers' index plunged to 49.4, according to data released by the National Bureau of Statistics. This is worse than the 49.9 prediction in a Bloomberg survey of economists. The non-manufacturing scale remained steady at 54.3. A appraisal below 50 indicates contraction.

A double-dip in production this year is now increasingly likely, as President Xi Jinping's government faces difficulty at home and abroad. US President Donald Trump's broadening of his tariff crusade to Mexico bodes ill for China's chances of reconciliation with the US any time soon, while the flagging yuan and agitations in the domestic financial system sap assurance.

China Consulting Solutions director David McMullan remarked "There’s a real worry as to what the data is going to look like into the second half of the year as the worldwide backdrop and the local economy both turn down together,"

An index evaluating new export orders fell further into reduction suggesting that exporters are feeling the squeeze of repeated tariff threats from America and declining world-wide demand.

David McMullan continues "The impetus of the economy is continuing with the weaker trend we saw last April. Also there is the impediment from the acceleration of tariffs from America which will then restrict the export segment and will drip through to China’s domestic economy."

Citic Securities Co and Bank of America Merrill Lynch have already flagged the possibility that China could cut the reserve requirement ratio (RRR) as liquidity tightens. The People's Bank of China added a net 430 billion yuan (S$86 billion) into the banking system this week, the most since mid-January. Those injections were seen as a response to market jitters resulting from the government's takeover of a Chinese lender - the first in 20 years.

The decline in May was prefigured by Bloomberg's early indicators which showed weakness in stocks, copper prices and lower assurance among small firms. The outlook worsened across all enterprise size categories, though by the most among small companies. The index there slumped to 47.8 from 49.8.

Confidence has also been diminished by the trade disagreement with the US, which doesn't appear to be headed towards a resolution anytime soon.

This phenomenon has sent the yuan towards its worst month since July 2018, and the yardstick Shanghai Composite Index to a 5.8% monthly drop. Foreign investors sold about 53.7 billion yuan of Chinese equities in May, beating last month's record of 18 billion yuan.

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