INSIGHT: China industries expand for fifth month; downside risks still high

Author: Pearl Bantillo


SINGAPORE (ICIS)--China’s industries have remained in expansion mode for the fifth consecutive month in July, recovering from a record slump in February but downside risks to economic growth are high as the coronavirus pandemic rages on.

The official manufacturing purchasing managers’ index (PMI) of the world’s second-biggest economy in July rose to 51.1 from 50.9 in the previous month, backed by recovering production and demand.

The production index for the month inched up 54.0, while the new orders index increased to 51.7.

PMI gauges the health of an economy’s manufacturing sector, with a reading of 50 and above indicating expansion, while a lower number denotes contraction.

The novel coronavirus outbreak, which started in China’s central city of Wuhan in late 2019, has plunged the global economy into a deep recession due to lockdowns implemented to contain the deadly pandemic.

China is largely expected to avoid a recession in 2020 but full-year growth will be in the low single-digit level, representing a sharp slowdown from the 6.1% pace in 2019.

“The pandemic has amplified the need to close gaps in China’s social safety nets both to support distressed workers and households, and to help minimize the lasting weakness of domestic consumption,” said Sebastian Eckardt, lead economist for China at the World Bank.

In its July 2020 China Economic Update report titled “Leaning Forward – COVID-19 and China’s Reform Agenda”, the World Bank forecasts the country’s GDP growth to slow to 1.6%, the slowest expansion since 1976.

“While risks are exceptionally high, they can be partially mitigated by good policies,” World Bank China country director Martin Raiser said.

“The pandemic shock has exposed deeply connected economic, social, and environmental fragilities, further increasing the urgency of rebalancing the economy toward more inclusive, sustainable, and greener growth. The recovery offers an opportunity to accelerate progress towards these goals,” Raiser said.

While supply side constraints have eased as indicated by recovering production, domestic and external demand have largely remained weak, thereby slowdown the pace of recovery.

“On the downside, recurrent COVID-19 [coronavirus disease 2019] flareups could continue to disrupt economic activity, despite efforts to suppress the spread of the virus,” it said.

The global tally of infections stood at more than 16.8m, with the death toll at above 660,000 as of 30 July, according to data from the World Health Organisation (WHO).

“Externally, a deeper and more protracted global recession and escalating bilateral tensions between China and some of its main trading partners could also derail the recovery,” the World Bank said.

GDP contraction among industrialised economies is projected to be steeper compared with emerging and developing countries.

The US, the world’s biggest economy, has the highest number of coronavirus cases in the world at more than 4.3m with deaths topping 140,000.

Europe's cases of infections have exceeded 3.3m , while southeast Asia has over 1.9m cases as of 30 July, WHO data showed.

“On the upside, the downturn could be less severe if domestic and global confidence recover faster than anticipated, and if economic tensions de-escalate,” the World Bank said.

With the US, tensions have recently heightened following a tit-for-tat closure of consulate offices in Houston and in China’s Chengdu, which could imperil implementation of their phase 1 trade deal.

With India, border tensions have flared since mid-June and the south Asian country is now bent on weaning itself off import dependence on China and is in the process of erecting trade barriers.

“Policymakers [in China] will need to ensure monetary and financial sector policies remain flexible to provide abundant liquidity and keep market rates and bond yields low, easing the debt burden on households, firms, and governments,” the World Bank said.

“Fiscal policies will need to play a critical role in supporting the recovery. Stimulus measures should be designed in a way that contributes to achieving more inclusive, carbon-neutral and greener growth,” it added.

By Pearl Bantillo

Additional reporting by Fanny Zhang

Photo: Night view of Yangshan Port in Shanghai, China - 29 Jul 2020 (Photo by Shutterstock)

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