It is the beginning of a new month, which means that various indicators used to evaluate the health of China’s economy have been released. And in what has become somewhat of a ritual, the news is decidedly negative. Among the indicators released today was the official Purchasing Managers’ Index (PMI), which tracks the performance of the manufacturing industry. China’s PMI has registered worsening conditions in manufacturing for six consecutive months, but the figure released today by the country’s National Bureau of Statistics (NBS) was notable because it was lower than expected at 49.4 – the lowest its been since August 2012. The non-manufacturing PMI was down to 53.5 in January, a seemingly positive result considering that a score over 50 still represents growth in the service economy. But, for both the manufacturing and service sectors, the figures still indicate a contraction in available jobs.
Judging the state of an economy through a PMI figure by itself is a little misleading for two reasons. First, in the case of China’s manufacturing PMI, it creates a news cycle focused on the monthly release of one statistic. The underlying trends shaping the negative performance in China’s industrial sector, however, are a constant reality. For instance, the NBS also announced on Jan. 27 that annual industrial profits in China fell 2.3 percent in 2015 – the first time that China registered an annual decline in industrial profits in over a decade. The number was affected by that summer’s stock market chaos – August 2015 saw profits decline by a record 8.8 percent for the month, and China’s Ministry of Finance noted that state firms’ profits decreased precipitously over the summer. That does not bode well for industrial profits in the future. The numbers released last week, indicating a decline in industrial profits by 4.7 percent, only reflected data from December and did not take into account January’s stock market crash and the continued assault on the Chinese yuan.
The second reason PMI figures are misleading is that they are esoteric. The PMI figure itself combines five different indicators, including new orders and supplier deliveries. But one cannot glean any more detail from a PMI figure besides asserting that a particular sector is either contracting or expanding. Furthermore, the data is released by the NBS – the same bureau whose chief, Wang Baoan, was detained on Jan. 26 as part of an investigation into corruption allegations.
That is why it is important to not only track China’s economy continuously using limited statistics, but also to find other indicators to confirm or deny the presence of a problem. One important such indicator is South Korean trade data, which is released on the first business day of each month. Since China is South Korea’s most important trade partner, a decline in exports could signal a slump in Chinese demand and, therefore, a slowing Chinese economy. Here, the news is also bad: in January, South Korean exports fell 18.5 percent and imports plunged 20.1 percent year-on-year, the largest decline registered since August 2009. Besides having negative implications for South Korea – which derives about 50 percent of its GDP from exports – it is also a confirmation of the weakness of the Chinese economy, as almost a quarter of South Korean exports go to China.
There is also anecdotal evidence suggesting that the employment market in China is worsening more than official statistics indicate. The Chinese Labor Ministry’s figures on urban joblessness have reliably hovered around 4 percent, and the national statistics have not fluctuated much from the 5 percent range. But other statistics indicate that there may be a more significant problem lurking under the surface. China’s migrant population declined by about 2 percent in 2015 – a fact that seems innocuous on the surface. But 2015 was the first time in 30 years that such a decline had been registered, and is potentially an indicator that fewer jobs are available for or attractive to China’s migrant workers.
In addition to this, various reports in the media indicate subtle changes in the job market around the upcoming Chinese New Year on Feb. 8, a time when millions of Chinese workers will return home to spend time with their families. But the South China Morning Post (SCMP) reported on Jan. 26 that train stations were crowded earlier than is normal for the New Year travel season, and that workers were being allowed to start their holidays early. This is a sign that companies are either lacking orders, looking to save a little bit of money on wages, or both. The SCMP also reported on Jan. 25 that some migrant workers were looking to secure jobs before the holiday – a marked change from previous years when they would typically look for work after the holiday.
The silver lining to these stories is that China may be trying to move forward with difficult reforms meant to reduce inefficiency within the economy. The supply-side reforms being pushed by President Xi Jinping and the Communist Party are intended to reduce excess factory capacity and lower debt, and no matter how many times China lowers interest rates or reduces the reserve requirement ratio it will mean a certain degree of economic hardship. The question is whether China can undertake meaningful reforms and still maintain social stability.
This is what makes unemployment so important to watch, as well as signs of domestic unrest. Some indicators are already emerging, such as figures collected by the workers’ rights organization China Labour Bulletin showing more incidents of protests and strikes in December 2015 than any month since it began reporting in 2011. Xi and the Communist Party also continue to clamp down on corruption, with a spate of officials subject to investigation or discipline. Besides the chief of the statistics bureau, the former head of one of China’s largest banks has been demoted and placed on probation, a former vice minister of public security has landed a 15-year jail sentence and prominent Communist Party officials in northern China’s Hebei Province have been expelled from the party – and that was all reported just in the past week.
Nothing particularly novel then happened in China today, despite the release of a figure that many consider an indicator of the Chinese economy’s health. But the trajectory of the Chinese economy is known, as are the inevitable social and political consequences that manifest as a result of China’s structural challenges. The crisis of China is not in the revelation of any one statistic or event: it is in the slow, unceasing pressure its geopolitical reality imposes on a daily basis.