Trade War Weighs on Manufacturing, Caixin Index Shows

China’s manufacturing sector expanded at a weaker pace in August, as demand growth fell to a 15-month low due largely to Sino-U.S. trade tensions, a Caixin survey showed Monday.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), an indicator giving a snapshot of operating conditions in the manufacturing sector, slipped to 50.6 in August from July’s 50.8, marking the third consecutive monthly drop and the slowest expansion since June 2017.

The Caixin manufacturing PMI, one of the first available monthly indicators showing economic conditions in the world’s second-largest economy, is closely watched by investors. A number above 50 indicates an expansion in activity, while anything below signals a contraction. The further above 50, the faster the expansion, the further below 50, the greater the contraction.

In August, cooling demand and strong supply were evident at the same time across the manufacturing sector.

New orders grew at the slowest pace since May 2017, while new export orders shrank for the fifth month in a row, the survey showed.

“Weaker foreign demand contributed to the softer increase in overall new work,” according to the survey.

Manufacturers’ confidence towards future output remained stuck near June’s six-month low, “with a number of panellists citing concerns over the impact of the ongoing China-U.S. trade war and relatively subdued market conditions,” the survey said.

On the supply side, manufacturing production increased at the fastest rate since the beginning of the year.

“I don’t think that stable supply can be sustained amid weak demand,” said Zhong Zhengsheng, director of macroeconomic analysis with consultancy CEBM Group, a subsidiary of Caixin Insight Group. “China’s economy is now facing relatively obvious downward pressure.”

Headcount reduction and higher inflation

Companies responding to the survey remained downbeat about hiring in August. The employment subindex showed the steepest contraction in 13 months, indicating more companies were shedding workers than hiring. Anecdotal evidence from the survey indicated that headcount reduction was due to company restructuring and cost-cutting initiatives.

“The worsening employment situation is likely to have an impact on consumption growth,” Zhong said.

In addition, the Caixin survey showed higher price pressures in August, with both prices charged for factory output and prices paid for production inputs rising at faster rates. “According to panellists, higher raw material costs drove the latest upturn in (input) purchasing prices,” the survey said.

This was similar to the results of the official manufacturing PMI survey, in which prices for major raw materials used for production rose faster in August than July, and so did the prices that companies charged customers. 

China’s official manufacturing PMI, released by the National Bureau of Statistics on Friday, inched up unexpectedly to 51.3 in August from July’s five-month low of 51.2.

The Caixin manufacturing PMI, sponsored by Caixin and compiled by data analytics firm IHS Markit Ltd., focuses on light industry, while the official survey focuses on heavy industry. The geographic distributions of the companies covered in the two surveys are different.

Manufacturing accounted for 30% of China’s gross domestic product (GDP) in the first half of this year, according to Caixin calculations based on government data. The services sector was responsible for the lion’s share of the country’s economic activity, accounting for 54% of the total GDP over the period.

The Caixin China General Services Business Activity Index, which tracks the growing services sector, is scheduled to be released on Wednesday.

Contact reporter Lin Jinbing (jinbinglin@caixin.com)

Read more about Caixin’s economic indexes.