On Monday, the Chinese government announced that its manufacturing Purchasing Managers’ Index (PMI) fell to 49.0, below Reuters’ forecasts of 49.3 and January’s reading of 49.4.
A number below 50 indicates that manufacturing has declined for the month. (For those distrustful of Chinese government numbers, an unofficial manufacturing PMI known as Caixin showed a similar decrease, from 48.4 last month to 48 in February.)
Even though a manufacturing decline may seem like bad news for the U.S. stock market and even indicate a global economic slowdown, it may, paradoxically, be the harbinger of good news from China.
While the manufacturing PMI has been declining for several months, the non-manufacturing PMI finished at 52.7 for February.
This is a decline compared to 53.5 in January, but it this shows that non-manufacturing segments of the economy are beginning to play a bigger role in China.
In response to the manufacturing decline, China cut its deposit reserve requirement ratio by 50 percent to free up additional lines of credit to stimulate the Chinese economy.
Like the Western world, China is interested in growing its service economy, at the possible expense of manufacturing. This is especially relevant for a few reasons:
- China’s past economic growth has been the result of manufacturing goods and exporting them to countries like the United States and online retail outlets such as Ryderwear or eBay. But foreign markets are currently tapped out, and that does not account for rising protectionist sentiments both in the US and Europe.
- China is in an interesting position as a middle-tier economy with too many college graduates and not enough blue-collar workers. While China could encourage the growth of blue-collar workers, it is choosing a more service-based economy to better provide its people with jobs.
- A service-based economy assumes that there is a Chinese consumer base willing to spend money on services. So far, that doesn’t appear to be the case. China, along with other Asian countries, has a much higher savings rate compared to Western countries, which means that less money flows through the economy.
Investors shouldn’t be too concerned about the drop in Chinese manufacturing; U.S., as well as global, stocks don’t appear to be seriously affected. Initially, news about the manufacturing decline caused U.S. markets to decline, but news about a government stimulus immediately caused the market to rebound.
Although the U.S. manufacturing PMI index also stayed below 50, it improved, while construction reached its highest level of activity since 2008. There are also signs of increased inventories and orders, and oil prices are continuing to stay low and stimulate further economic growth.