Two weeks after the latest economic data dump from China showed a continued slowdown in the local economy, the latest PMI surveys confirmed that the weakness in China’s manufacturing sector was accelerating.

According to the official NBS manufacturing PMI which was released on Sunday, sentiment dropped further in September, despite what has been a mild upward seasonal bias in recent years. All sub-indexes showed weaker growth momentum. The Caixin manufacturing PMI also declined in September, reflecting the nation’s economic slowdown and fallout from the trade war with the U.S. The NBS non-manufacturing PMI was stronger, however, due entirely to a surge in the construction PMI.

China’s NBS manufacturing PMI fell to 50.8 in September, from 51.3 in August and below the Bloomberg consensus of 51.2. While this was the first September drop since the NBS manufacturing PMI series was released, it was also the 26th consecutive month of prints above the 50-point mark that separates growth from contraction.

Looking at the components, all the major sub-indexes showed weaker growth momentum in September. The production sub-index moderated 0.3pp to 53.0 and the new order sub-index was 0.2pp lower at 52.0. Trade indicators softened as well—the new export order sub-index fell to 48.0 from 49.4, and the imports sub-index declined 0.6pp to 48.5. Both indexes were at the weakest levels since February 2016. The employment sub-index fell 1.1pp to 48.3, and the suppliers’ delivery times sub-index rose 0.1pp to 49.7 (higher suppliers’ delivery times imply weaker demand conditions). The raw material inventories index was 0.3pp lower, and the finished goods inventory index was unchanged vs August. Inflationary pressures increased mainly at the input level – the input price index rose 1.1pp to 59.8, and the output prices index was unchanged at 54.3.

Separately, the Caixin manufacturing PMI – which better reflects sentiment among smaller, private firms – declined to 50 from 50.6, the lowest since May 2017 and ending 15 months of expansion, with export orders falling the fastest in over two years as U.S. tariffs are starting to take a toll on the economy.

The output sub-index fell 1.4pp to 51.1, and the new orders sub-index was 50.1, 0.5pp lower the August. Similar to the NBS manufacturing survey, new export order index in the Caixin manufacturing survey softened in September, with companies citing “the China-US trade war and subsequent tariffs” as contributing factors according to the Caixin survey.

“The further slowdown in China’s official manufacturing PMI in September reflects the intensifying impact of the U.S.-China trade war on China’s manufacturing export sector,” said IHS Markit APAC chief economist Rajiv Biswas. “The near-term outlook for the Chinese manufacturing export sector remains weak, albeit the Chinese government may apply some further stimulus measures to support growth.”

It was not all gloom, however: the official non-manufacturing PMI picked up to 54.9, signaling that domestic demand for services and construction remains strong enough to mitigate some of the external headwinds that the economy is facing, largely the result of the bubble housing sector. While the services PMI reading was the same as August at 53.4, the construction PMI spiked to 63.4, 4.4pp higher from August (which might reflect the unwinding of previous drag from adverse weather conditions). That construction uptick, if sustained, could be a sign that the measures aimed at boosting infrastructure investment are starting to kick in.

According to Goldman’s Maggie Wei, the decline in the manufacturing PMI surveys “indicates that growth faced increased downward pressures in the manufacturing sector, driven by weaker export growth, possibly due to a combination of slower global demand and increased trade tensions, has possibly weighed on activity growth in the manufacturing sector.”

Goldman’s assessment is that as a result, “more policy easing measures (such as targeted RRR cuts as discussed in the recent state council meeting) could be announced in the near future to help buffer growth downside.”

Others agreed: “the government’s support policy will start to have an impact in the fourth quarter, which could offset the damage of the trade war,” said Gao Yuwei, a researcher at Bank of China. “The efforts to shore up infrastructure investment has been driving up construction activity, and services industries normally perform better in the third and fourth quarter.”

As Bloomberg notes, officials have promised fiscal stimulus in the form of tax cuts and infrastructure spending to buffer the domestic economy somewhat from the effects of the trade dispute. Analysts also expect China’s central bank will continue topping up liquidity in the financial system to support economic growth.

And while there are pockets of strength, primarily within construction, whatever stimulus China has injected has yet to reach the broader economy.

While private companies fared worse than state-owned enterprises, discrepancies in that data suggest that the picture for Chinese manufacturers may be worse than officially-reported growth rates show, according to Bloomberg.

More ominously, the official PMI report also indicates rising unemployment in the manufacturing sector, with CIC Corp’s Wenqi Liu writing that she will “continue to closely watch infrastructure and property investment growth, as they might lead the cyclical stabilization.”

For now, however, the attention of China’s manufacturing sector remains squarely focused on the growing danger of escalating trade war with the US, and as long as there is little hope of a solution, sentiment will continue to deteriorate.

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