Is China’s era as the world’s factory coming to an end?

Is China’s era as the world’s factory coming to an end?

A Chinese economic slowdown is a growing fear. January’s purchasing managers’ index (PMI) of 50.5 seems to confirm such fears, as China’s manufacturing sector now comes dangerously close to not only slowing down, but contracting.

China’s official manufacturing PMI fell to 50.5 in January 2014, down from 51.0 in December 2013. This is a six-month low. The HSBC PMI index also showed a decline from 50.5 in December 2013 to 49.5 in January 2014. In comparison, a euro-area manufacturing index increased from 52.7 in December 2013 to 53.9 in January 2014.

The PMI index is taken as a measure of the performance of the manufacturing sector, and is based on five sub-indexes: new orders, inventory levels, production, supplier deliveries and the employment environment.

From December to January, official Chinese PMI data saw a decrease in the production sub-index, as well as a decrease in the new orders sub-index, which fell for a fourth consecutive month to 50.9. New export orders also fell by 0.5 percentage points to 49.3, indicating a decline in overseas demand.

For ‘the world’s factory’, a decrease in PMI is especially painful. Getting close to 50 is also worrying, as a reading under 50 signifies a contraction in manufacturing. The Chinese manufacturing miracle is dangerously close to officially contracting, on top of potentially having to pass on the title of ‘world’s factory’.

Various sources argue that the decrease in PMI is only indicative of the Lunar New Year holiday break. China’s January PMI is usually lower as the entire nation takes seven days off work, closing most factories and businesses. This year, the Lunar New year started from January 31, as compared to February 10 last year, and many factories may have shut a bit earlier. This explains why January 2014 had a lower PMI than both December 2013 and January 2013, which were largely unaffected by the Lunar New Year break.

Many have contested this, arguing that the PMI decrease still signifies a change and that an economic slowdown has already begun in this superpower. Rapid growth and increasing wages in China have encouraged global factories to hand over their production to other countries, including Thailand, Vietnam, and, increasingly, Myanmar.

This is also indicated in changes to China’s GDP, with the economy growing at 7.7% last year, its slowest growth since 1999. China’s decades of double-digit growth are definitely ending, not only in the manufacturing sector as signified by the decline in PMI, but also in the service sector, which eased to a five-year low in January.

However, China is still expecting stable growth during the year of the horse, says Zhang Liqun, an analyst with Development Research Centre of the State Council to Chinese state-run Xinhua news agency. Economists with Bank of America Merrill Lynch have insisted that the growth slowdown is not imminent, and have maintained a 7.6% growth forecast for 2014. CNN reports that other sources have predicted 2014’s growth to slow to about 7.4%, still well above the majority of the world.

Categories: Asia Pacific, Economics

About Author

Margaux Schreurs

Margaux lives in Beijing and works as an editor at a Beijing-based magazine and website, and writes on a freelance basis for a wide range of publications throughout the world, mainly focusing on East and Southeast Asian current affairs. She is a London School of Economics and Political Science MSc graduate.