China Won’t Save Global Growth
The surge in factory activity since the lifting of seasonal pollution controls is likely to be a one-off boost
By Nathaniel Taplin
RED HERRING
Change from a year earlier
Source: CEIC*Average of output growth in steel, cement, glass, non-ferrous metals and electricity.
Amid the sturm und drang in global markets, an apparent ray of light from China’s latest monthly purchasing managers index: the healthiest factory activity in eight months, with both total orders and new export orders quickening.
The key factor lifting China’s PMI from barely 50—the line between contraction and expansion—as recently as February to a rosy 52.9 in May was domestic. Industrial activity has surged since seasonal pollution restrictions ended in March, releasing winter’s pent-up demand. That’s one reason that global commodity prices haven’t suffered more from the recent strong dollar.
The bad news is that this is likely to be a one-off boost. That could spell trouble for some commodity-dependent emerging markets like Indonesia, particularly if the dollar also keeps strengthening.
Pollution controls: off. Photo: Qilai Shen/Bloomberg News
The impact of China’s pollution restrictions, a pet project of President Xi Jinping’s , is clear in the odd shape of Chinese data since the fourth quarter. As the winter curbs on heavy industry rolled through the country’s north starting last October, industrial production and real-estate investment nose-dived. Both began bouncing back between February and April as the restrictions eased. Credit growth, which usually leads industry and investment, slowed gradually throughout.
Spring fling aside, the fundamental forces driving Chinese real estate now look weaker than a few months ago. Residential floor space sold in April was down 4% from a year earlier, the first drop in half a year. More important, property inventories, whose decline has been a key driver of the long upturn since 2015, look close to leveling off. After roughly halving from mid-2015 to late 2017, they have been stable since December at about 18 months of sales, according to Rosealea Yao, senior analyst at Gavekal Dragonomics in Beijing.
House prices are still rising—for now—meaning the second-half slowdown is unlikely to be overly severe, unless trade tensions or the eurozone’s incipient relapse into crisis really damage external demand.
Still, investors shouldn’t look to China to save the day either. For now, global growth rests firmly on the shoulders of that old workhouse, the U.S.
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