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China's best hope for its economy is fading
(Reuters)
A migrant worker carries a bag at a railway station's square during sunset in Nanjing, east China's Jiangsu province December 25, 2005.
Think of China's economy as having two parts, New China and Old China.
Old China is made up of manufacturers, exporters, property developers, and foreign investment.
New China is a growing services sector — technology, banking, retail, and other
domestic consumption.
New China needs to grow as fast as Old China is shrinking, if the country's going to avoid the hard economic landing everyone's been worried about for years.
But that's not what's happening.
On Monday night, China released its official and unofficial Purchasing Managers Index data for August. The official PMI, which includes Old China, fell to a dismal 49.7 — any read under 50 indicates a contraction in the sector.
The unofficial read of Old China was even worse, the Caixin manufacturing PMI came in at 47.3, its lowest read since 2009.
Old China was expected to decline, but not this fast. A flash reading of South Korean export data released on Tuesday showed the country's sales falling by 14.7%. It's far more than analysts expected and significant because China and South Korea's export numbers move together.
This wouldn't be so bad if it weren't combined with the August read of New China. According to the data, China's services sector is barely holding on to growth.
"The official non-manufacturing PMI and Caixin services PMI also fell, though holding above the 50 mark that separates improving from deteriorating conditions," wrote Bloomberg economist Tom Orlik in a note following the release.
"The relative resilience of China’s services sector remains a positive, though the latest signs suggest the slowdown is becoming more broad-based."
(Markit Economics)
This weakening is especially troubling since the government has started pulling out all the stops to keep money flowing through the economy. Rate cuts, reserve cuts, supporting the stock market, loosening housing-market policy — it's all being done, and there will likely be more before the year is out.
The problem is that so far this stimulus doesn't seem to be jump-starting the economy. Caixin's survey showed employment in the services sector growing at only a "marginal rate," Orlik pointed out.
In other words, the best hope for growth in China's economy is starting to fade.
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