China’s economy is moving into stagnation as manufacturing slumps and Inflation expectations rise.
On Monday, Caixin’s manufacturing PMI for February recorded its lowest level since May last year, while the official manufacturing PMI data for February released by the Statistical Bureau of the Communist Party of China showed a third consecutive month of decline; at the same Time, the prices of major raw materials were at a higher level in recent years in February, and inflationary expectations have picked up. In this regard, Ren Zeping, chief economist of Evergrande, wrote an article on March 1, pointing out that China’s supply and demand expansion has weakened and the economy has stepped from recovery to stagflation.
Chinese manufacturing activity falls back
On Monday (March 1), the Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 50.9 in February, the lowest level since May.
Analysts polled by Reuters previously expected the index to be unchanged from January’s 51.5. A PMI above 50 indicates expansion in manufacturing activity, while below 50 indicates contraction.
Caixin PMI a production classification index fell to 51.9, the lowest rate of expansion since April last year, another new orders classification index fell to 51.0, the lowest level since May.
Export orders contracted for the second consecutive month. Factories cut jobs for a third straight month and at a faster pace, said Wang Zhe, senior economist at Caixin Insight Group, adding that “companies are not in a hurry to fill vacancies.”
Earlier on Sunday (Feb. 28), data released by the Communist Party’s Bureau of Statistics showed that the official manufacturing purchasing managers’ index (PMI) recorded 50.6 in February this year, down 0.7 percentage points from the previous month and the third consecutive month of decline.
This follows an official manufacturing PMI of 51.3 in January, down 0.6 percentage points from the previous month.
In February 2020, the official manufacturing PMI of the CPC was 35.7, a record low.
The data showed that the new export order index and import index were 48.8 and 49.6 respectively in February, 1.4 and 0.2 percentage points lower than the previous month. Foreign trade business in the manufacturing sector decreased compared with the previous month due to the slowdown in production and purchasing activities of enterprises during the Yellow New Year.
Reuters reported that the slowdown in manufacturing highlighted the fragility of China’s economic recovery.
Inflation in China expected to pick up
Data show that the impact of the continued upward movement of international commodity prices, the purchase price index of major raw materials in February was 66.7, higher than 60.0 for four consecutive months, the purchase price of raw materials to push up ex-factory prices, ex-factory price index in February than the previous month 1.3 percentage points, 58.5, respectively, compared with the previous month change of -0.4 and 1.3 percentage points, the recent higher level.
From the industry situation, petroleum processing coal and other fuel processing, ferrous metal smelting and rolling processing, non-ferrous metal smelting and rolling processing, electrical machinery and equipment and other industries, the purchase price index of major raw materials are more than 70.0%.
Evergrande Chief Economist Ren Zeping commented that the difference between ex-factory prices and raw material price index is still large, with a difference of -8.2 percentage points in February. Upstream enterprises benefit more obviously than the middle and lower reaches, the overall profitability is still under pressure; the price index is running high and inflationary expectations are rising.
China’s economy is moving into stagflation
Ren Zeping, chief economist of Evergrande, wrote an article titled “Stagflation is coming” on March 1, saying that China’s supply and demand expansion is weakening and the economy is moving from recovery to stagflation.
According to Ren Zeping, a number of indicators in February PMI data such as production, new orders, new export orders and construction activity reflect a decline in economic operation, some for two consecutive months, while the price index is at a high level in recent years, which is typical of the economic cycle turning into stagflation.
According to Ren Zeping’s judgment, around the first quarter of 2021, the Chinese economy is ushering in a cyclical inflection point in broad liquidity as the top range of the economic recovery approaches, inflationary expectations rise, monetary policy returns to normalization and credit policy tightens structurally. This indicates that China’s economic cycle is shifting from recovery to stagflation, with structural asset price bubbles and monetary easing coming to an end.
Ren Zeping said that since the end of 2020, local hotspot cities have seen rising Home prices and exposure of local debt risks, and the central bank and financial regulators have started structurally tightening financial credit policy in three major directions, including real estate financing, local debt and shadow banking.
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