China’s Manufacturing Activity Slows Amid Growing Trade Risks

December PMI drops slightly, signaling weakening growth prospects
China’s manufacturing sector showed signs of slowing down in December, with the Purchasing Managers’ Index (PMI) dipping to 50.1 from 50.3 in November. This slight decline marks the third consecutive month that the index has remained above 50, which still indicates expansion in manufacturing activity. However, the slowing pace of growth highlights increasing challenges for the country’s industrial sector, as it grapples with both internal and external pressures.

Declining Output and Growing Trade Risks
Output component drops while export orders rise amid tariff fears
A significant factor contributing to the slowdown in manufacturing activity was a decline in the output component of the PMI. Gabriel Ng from Capital Economics noted that this indicates weaker production levels, even though overall new orders rose to an eight-month high. Additionally, export orders saw an increase, likely driven by US importers rushing to secure Chinese goods before potentially higher tariffs are imposed by the incoming US administration. President-elect Donald Trump’s pledge to introduce 10% tariffs on Chinese goods has heightened trade uncertainty, putting additional strain on China’s export-driven economy.

Despite the rise in export orders, concerns about future trade disruptions have left manufacturers cautious. China is already facing an array of economic challenges, including a faltering domestic economy marked by sluggish consumption and a continuing property crisis. The looming trade risks only add to the uncertainty for manufacturers looking to maintain growth.

Non-Manufacturing Sector Shows Resilience
Service and construction sectors offset manufacturing decline
In contrast to the manufacturing sector’s challenges, China’s non-manufacturing sector saw improvement in December. The non-manufacturing PMI, which includes services and construction, rose to 52.2 points, up from 50 in November. This indicates growth in sectors outside of traditional manufacturing, which may help balance some of the pressures faced by China’s industrial output. This growth, however, does not fully offset the broader weaknesses in manufacturing, which remains the backbone of China’s economic engine.

Economic Forecasts Adjusted Amid Structural Challenges
World Bank raises China’s growth forecast but highlights future risks
Despite the manufacturing slowdown, the World Bank has raised its forecast for China’s economic growth to 4.9% in 2024. However, the World Bank also cautioned that long-term structural challenges remain. These include reduced consumer confidence, an aging population, high debt levels, and low domestic consumption. These factors, in addition to the ongoing trade uncertainties, are expected to weigh on China’s economic prospects in the coming years, making it difficult for the country to achieve sustainable growth.