Overnight, China revealed the latest confirmation that its economy is slowing more conventional wisdom realizes when the National Bureau of Statistics reported that the manufacturing PMI fell to 50.2 in October - on the verge of a sub-50 contraction - down from 50.8 in September and below the 50.6 estimate. It was also the lowest number since July 2016 with almost all sub-indexes showing weaker growth momentum. The NBS non-manufacturing PMI also missed, printing at 53.9, and declining from 54.9 due to the weaker services PMI.
Commenting on the report, Goldman said that "growth faced increased downward pressures in the manufacturing sector" and highlighting the continued decline of trade-related indexes, noted that "weaker external demand has possibly weighed on activity growth in the manufacturing sector." Meanwhile, weaker auto sales also translated into soft auto manufacturing activities and dragged on overall manufacturing growth.
Goldman also blamed "slower property transactions" for the drop in the services PMI, which was further impacted by the the drop in the stock market : the NBS observed that the October PMI reading for the securities industry was the lowest this year, excluding the Chinese New Year months.
But most importantly, Goldman - as well as most China watchers - took the report to indicate further accommodative policy would be ushered in by Beijing to support contracting economic growth (Goldman expects one more RRR cut before the end of this year).
Perhaps hearing this request, on Wednesday China’s leadership vowed that further stimulus is being planned to prevent the broad slowdown from taking hold. Admitting that Beijing's cocktail of fiscal and monetary stimulus has been behind the curve, a Wednesday Politburo meeting chaired by the president said that "downward pressure" is increasing, and the government needs to take timely measures to counter this.
"Changes are happening even though the economy is still stable. Downward pressure on the economy has grown, some companies have a large number of operational difficulties, and some risks and hazards that accumulated over a long time are revealing themselves" the Politburo statement said, promising to take preemptive action "in a timely manner."
"The leadership is paying great attention to the problems, and will be more preemptive and take action in a timely manner," according to the statement. The Politburo reiterated that China will maintain a proactive fiscal policy and a prudent monetary policy, while trying to find solutions to help private businesses.
And yet, despite its reluctant promises, China finds itself in a dilemma: any further monetary easing will devalue the Yuan below 7.00 against the dollar, a critical level to both the PBOC, and to the Trump trade hawks, who will see breach of this key level as confirmation of currency war and react appropriately. Meanwhile, further fiscal stimulus would mean even more debt in a nation which already has over 300% debt/GDP, will record a record number of corporate bond defaults in 2018, and has been grappling with periodic on again, off again deleveraging campaigns which have so fair in reducing China's debt load.
And just in case stabilizing the economy was not enough, China has been grappling with a plunge in its stock market in recent months. Meanwhile, China's economy continues to contract and Beijing needs to respond, or else suffer the worst possible outcome: social insurrection as millions of angry, unemployed workers find themselves without a job for an extended period of time.
In response, earlier this month, the government and central bank introduced a raft of measures to stabilize sentiment, adding to steps to boost liquidity in the financial system, tax deductions for households and targeted measures aimed at helping exporters. Alas, those measures have yet to have much effect.
"The spring of 2019 will be the real difficult time for China as multiple factors such as trade tension, slower sales of durable goods and the end of a property boom in lower-tier cities weigh on growth," Lu Ting, chief China economist at Nomura International Ltd. in Hong Kong, said after the announcement. "It’ll be a test if China can sustain growth of around 6.5 percent. Policy makers are likely to further cut taxes and ease property purchase controls in bigger cities to lift the economy."
"The spring of 2019 will be the real difficult time for China as multiple factors such as trade tension, slower sales of durable goods and the end of a property boom in lower-tier cities weigh on growth," said Lu Ting, Nomura's chief China economist. "It’ll be a test if China can sustain growth of around 6.5 percent. Policy makers are likely to further cut taxes and ease property purchase controls in bigger cities to lift the economy."
China's borderline contracting PMI numbers came just hours after South Korea reported that the a global economic contraction is increasingly taking hold, and just days after it reported the worst GDP print in 9 years, overnight South Korea doubled down with a shocking industrial output number, which tumbled 8.4%, far below the -5.4% consensus estimate, and the worst print since March 2009.
The contraction was pronounced in electronic parts (-7.8% mom sa) and electrical equipment (-6.0%). Together with autos (-4.8%), these accounted for around half of the sequential decline, and suggest that some of the highest value-added manufacturing sectors around the globe are suffering a sharp slowdown.
Meanwhile, with Asia's two workhorse economies on the verge of economic contraction, Trump has threatened to take trade war with Beijing into overdrive by taxing all Chinese imports, a step which would have an adverse impact not only on China, but also on the US economy, which while having decoupled from the rest of the world in recent months, as confirmed most recently by the stronger than expected 3.5% Q3 GDP, is starting to show growing sign of slowdown.
Should the US economy join the malaise that has crippled the rest of the world, the only pillar left propping up the US stock market will be the strong corporate earnings. And judging by the sharp drop in stocks this month, traders are increasingly convinced that it is only a matter of time before the US market remains "pillarless."