Asia | China's economy

Why Chinese economic worries look overdone

Despite financial nervousness, rebalancing continues

WITH investors already in a febrile state of mind about China’s slowdown, the latest bits of gloomy news only seemed to confirm their worst fears. A survey showed that its manufacturing sector is on track in August for its weakest month since the dark days of the global financial crisis more than six years ago. Adding to the sense of panic, Chinese stocks plunged another 4% on Friday, closing off one of their worst weeks in years. The sell-off, which has already scorched emerging markets, enveloped developed markets as well; European, Japanese and Australian stocks all fell. Investors, though, are hardly known for taking measured views when markets get topsy-turvy. There is good reason to be anxious about China, but the pessimism is almost certainly overdone.

No one doubts that China’s factories are struggling. Industrial growth was 6% year-on-year in July, well below the double-digit rates of the not-too-distant past. The manufacturing survey published on Friday suggests that it is likely to slow yet further. New orders, exports and production are all down in August. One-off factors might have added to the troubles: last week’s deadly explosion in Tianjin wreaked havoc at one of the world’s busiest ports and, on top of that, thousands of factories are winding down their operations, ordered to close for a major military parade next month. But the malaise runs far deeper than these problems. Excess capacity built up over years weighs on manufacturers of everything from solar panels to office chairs. Private companies have started to deleverage but state-owned firms are only going deeper into debt.

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In other areas, though, things are—shock, horror—looking up. For the past two years, the main fears about China have centred on its property market, the heart of its economy. In recent months, prices have stabilised across much of the country and started to rebound in major cities. Developers have vast backlogs of unsold homes, so new housing starts are still falling and a big upturn in construction seems improbable. Exporters of commodities thus have little to cheer. But the bigger concern about the housing downturn was that it would undermine China’s financial stability and, in that respect, the recovery in property sales is welcome.

What’s more, China is not just about heavy industry. At the same time as growth is slowing, the structure of the economy is also changing. The services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year. The alarm on Friday stemmed from an unexpected fall in the purchasing managers’ index (PMI) for manufacturing sponsored by Caixin, a respected Chinese financial magazine. That gauge has been lilting southward for a while. By contrast, Caixin’s PMI for the services sector jumped to an 11-month high in July.

Brazilian iron-ore producers or Indonesian coal miners can take little solace from this. Whether the services are provided by accountants or restaurants, they consume far less energy and raw materials than heavy construction. But for China as a whole, there is more to the country than the building of highways and skyscrapers.

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