China: The world’s second-largest economy has trumped a global slowdown to post a rebound in manufacturing activities. But that may be short-lived. China is still dependent on the US market, which isn't expected to get better soon. And as other Asian countries try hard to snatch back lost market share, China will face new pressures.
China’s Purchasing Managers’ Index is closely watched as a leading indicator of how the economy is doing. A reading above 50 indicates expansion, while under 50 indicates contraction. The data isn’t perfect – there are both official and unofficial versions, and little adjustment for seasonal factors. August’s 51.7 is below the average before 2008's crisis, but a modest improvement over July.
Compared with most of China’s neighbours and trade partners, any expansion at all looks enviable. New export orders were up about 1 percentage points from July, while Japan's new export orders index fell 4.5 percentage points. Korea's average exports per working day hit a five-month low in August. The unofficial HSBC reading of Chinese new orders dropped 0.3 percentage points, but still looks better than others.
There are two threats to the recovery. The first is that other countries try to grab back a bigger slice of the export pie. China's currency, the yuan, weakened by almost 6 per cent in August against the dollar, the largest monthly drop since 2005. Japan’s yen, meanwhile, has strengthened 2.4 percent during the same period. Policymakers in Tokyo would like to reverse that trend if they can.
A bigger worry is that the pie itself may be getting smaller. Data from the US will give a clearer picture. A US PMI index due on September 1 is expected to ease further. A dip in demand would still hit China's exports hard.
Domestic demand won't easily pick up the slack. Steel and grain prices are rising, which increases prices for consumers. Foreign consumers may already be cutting back on discretionary items like clothing and textiles, judging by China’s export readings for those categories - and higher prices elsewhere may lead China's to do the same. China still looks better off than most, but its August recovery looks fragile.