The Blog of Changes - Duncan Freeman

The latest economic figures from China show that the growth rate of the Chinese economy has been slowing over the past few quarters. One of the causes of this has been the weakness of China’s major export markets, of which the EU is one.

The following two tables show two aspects of the problem. The first is the China’s manufacturing Purchasing Managers’ Index (PMI) from 2008 to date. The chart (a reading below 50 indicates a contraction of manufacturing output, a reading above 50 indicates an expansion) shows a slowdown in manufacturing in China in recent months. The HSBC China PMI index, which is compiled separately, tells more or less the same story.

Chart 1: China Purchasing Managers’ Index

Source: National Bureau of Statistics

The second chart shows the monthly year-on-year change in Chinese exports to the EU. The two charts show a broadly similar pattern, with the China PMI leading EU imports from China. Given that the EU has been China’s largest export market for a number of years it would be surprising if it did not have an influence on the Chinese PMI, even if China’s economic growth overall is far from being only dependent on the state of the EU economy.

Chart 2: EU Imports from China Monthly Change Year-on-Year

Source: Eurostat

Growth in the Chinese economy has been slowing, and is reflected in the declining GDP numbers and PMI in recent months, and this is in part related to the difficulties of its main export markets. This is just as it was in 2009, after the first wave of the crisis broke in the US and then in the EU .

However, this is not déjà vu all over again. Since mid-2011 China’s exports to the EU have fluctuated around the zero growth mark, but have not collapsed in the same way as in 2009 when at their worst they were falling at about 20% year-on-year. In the first eight months of this year EU imports from China have grown by 0.3% whereas in 2009 they fell by 13.6% over the whole year. Nor has the PMI in China collapsed as it did in the first phase of the crisis. Based on the latest statistics some economists have argued that the worst may be over for the Chinese economy. Indeed the manufacturing PMI has moved upwards in October.

Despite the deteriorating economic conditions across much of the EU, especially in the eurozone, and gloom about Chinese exports, the latest PMI and trade statistics indicate that the pattern of 2009 is not being repeated, for the moment at least. But they do not necessarily foretell a bright future either. The prospects of the EU providing demand are not encouraging if you are a Chinese exporter. Even if there is no collapse as in 2009, the chances of any real recovery in growth in the eurozone for the near term are minimal. Unlike last time round, China cannot expect that the EU will engineer a short-term rebound that will suck in imports. As even the IMF has noted, the EU is at best probably only half way through its crisis, with little chance of a return to growth for many years. The pattern established in recent months may be the best that China can expect from Europe for a long time to come. This may be no disaster, but the prospect of many lost years in the EU focuses attention on where the demand will come from to sustain manufacturing in China in the future.

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