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Asia

What does China's manufacturing slowdown mean?

A key private survey shows that Chinese manufacturing slowed to a two-year low in July, dashing hopes the economy may be steadying. DW examines the reasons for the slowdown and its impact on economic performance.

Caixin's Purchasing Managers' Index (PMI) - a key private economic indicator on Chinese manufacturing - dropped to 47.8 in July, indicating that the downturn in the sector intensified at the start of the third quarter. Released on August 3, the figure was below the 49.4 registered in June and the weakest reading since 47.7 in July 2013.

The index uses a 100-point scale, and a reading above 50 generally means a positive outlook, while anything below that mark is taken as a negative figure indicating contraction.

As for the reasons behind the recent slump, Caixin stated that renewed falls in both total new work and new export orders led manufacturers to cut production at the fastest rate since November 2011. Moreover, "softer client demand and reduced output requirements contributed to further job shedding and lower purchasing activity, with the latter declining at the sharpest rate since January 2012."

The Caixin publication follows the release of an official manufacturing PMI over the weekend which showed a drop to 50.0 in July from 50.2 in June, suggesting the world's second largest economy may face growth challenges in the third quarter.

Seen as a key barometer of the Asian giant's economic health, the drop in the index comes as China recorded a GDP growth of 7 percent last quarter, its weakest performance since the 2007-09 global financial crisis.

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China's benchmark stock market indices saw their values plunge recently

"Growth momentum in the Chinese economy has been moderating significantly since 2014, with GDP growth forecast to slow from 7.4 percent in 2014 to 6.5 percent in 2015," said Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS.

"Despite several rate cuts by the People's Bank of China and some moderate fiscal stimulus measures by the Chinese government, growth momentum has not shown any significant recovery," he added.

Just a temporary blip?

Adding uncertainty to the growth outlook has been the recent volatility in the country's benchmark stock market indices which dropped by nearly 30 percent after peaking on June 12.

The stock plunges have raised concerns for China's leaders who are already struggling to avert a sharper economic slowdown, and prompted the authorities to take a series of measures to halt the unprecedented slump.

However, Julian Evans-Pritchard, a China Economist at Capital Economics, believes the near-term risks for the overall economy will be limited.

"We wouldn't read too much into the weak July reading of Caixin's manufacturing PMI which we suspect was dragged down by bad weather and more downbeat business sentiment following recent stock market volatility," he said, adding that policy support from the government will ensure that real economic activity holds up over the coming months.

The weakness appears concentrated among small firms, which are more heavily weighted in the index, said the economist. "Indeed, the breakdown of the official PMI by firm size suggests that conditions have held up amongst larger firms which are more likely to have benefited from the recent rebound in infrastructure spending."

Headwinds

But although the current drop in China's manufacturing may have been due to temporary factors, economists warn of a bumpy road ahead for the sector. Sandra Heep, head of the Economic Policy and Financial System program at the Berlin-based Mercator Institute for China Studies (MERICS), says the latest PMI figures underline that China is currently undergoing a difficult phase of economic restructuring.

"China's export sector is suffering from rising wages, a stronger currency and subdued global demand. At the same time, domestic demand is also weak, putting China's manufacturing sector under a lot of pressure," Heep told DW.

The impact on the sector is also amplified by softer global demand for Chinese exports on account of sluggish growth in the US and EU, economist Biswas underlined.

The Chinese government therefore "will need to use more monetary policy stimulus through more policy rate cuts as well as further fiscal stimulus measures to stabilize the Chinese economy in coming months," the expert argued.

However, analysts say there are also limitations in terms of the government's ability to provide fiscal stimulus for rejuvenating manufacturing growth. Heep pointed out that although the central government debt remains low, local government debt in the country has skyrocketed in recent years due to the huge economic stimulus program during the years 2008-09.

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China recently unveiled a sweeping national strategy designed to enhance manufacturing competitiveness

Enhancing competitiveness

Tackling the poor outlook for the country's manufacturing - a key industry that has largely driven China's economic rise over the past three decades - is high on the agenda of the nation's policymakers.

This is especially the case after China's cabinet, the State Council, recently unveiled "Made in China 2025," a sweeping national strategy designed to enhance competitiveness in this sector through automation and overall improvement in technology.

It is part of a Chinese vision of an economy driven less by exports and investment and more by services and smart industrial production.

The 10-year strategy involves moving the Chinese economy away from labor-intense and low-value production towards higher value-added manufacturing, and includes plans to improve innovation, integrate technology and industry, strengthen the industrial base, foster Chinese brands and enforce green manufacturing.