Beware a Chinese Fall Stall

A construction site by Country Garden in Tianjin, China. The developer is now fighting for survival. PHOTO: TINGSHU WANG/REUTERS
A construction site by Country Garden in Tianjin, China. The developer is now fighting for survival. PHOTO: TINGSHU WANG/REUTERS

Summary

Sudden weakness in October purchasing managers indexes raises the prospect of another stall-out like the one that derailed China’s recovery this spring.

In July, when worries about China’s economic recovery were first beginning to percolate more widely, analysts fixated on a curious bit of language from the Politburo: the recovery was developing in a winding, “wave-like" manner.

Nearly half a year later, that characterization is looking more and more apt.

After a better third quarter, the first two key reads on China’s economy in October both landed with an audible thud. A bad case of seasonal affective disorder may be partly to blame. But it’s still not a good sign for an economy that was supposed to finally be on the mend. And there are some worrying similarities with the economy’s surprise stall-out this spring.

The composite purchasing managers index—produced by the statistics bureau and combining data from factories and the services sector—declined to its lowest level this year, just above the 50-point level separating expansion from contraction. The separate manufacturing PMI from Caixin, released Wednesday, fell below the 50-point mark for the first time in three months.

(Graphic: WSJ)
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(Graphic: WSJ)

There are a few important caveats. For one, the long, combined mid-autumn and Chinese National Day holidays—which happened to occur together this year and ran from the very end of September through early October—might very well have pulled some factory activity ahead into September. China’s statistics bureau asserted that seasonality was a factor in the factory PMI’s weakness. For another, the two surveys sent conflicting signals on exports: the official factory PMI showed new export orders falling faster, but Caixin’s survey had the decline moderating slightly, according to Goldman Sachs.

The more worrying signal is on domestic demand. If one takes the statistics bureau’s seasonality argument at face value, that means that some of the improvement in the September data—especially in building-related indicators like new housing space started and construction employment—might be seasonal too.

Moreover, the sudden weakness in employment—following a policy-driven bump in property-sector activity—bears a certain unnerving resemblance to China’s growth stall-out in late spring.

(Graphic: WSJ)
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(Graphic: WSJ)

Then, a surge of pent-up demand released after the end of China’s “zero-Covid" lockdowns petered out after a few months as underlying structural problems, including a weak job market, deeply damaged property developers and household risk aversion, reasserted themselves. Recently, September also witnessed a surge in consumer lending and better housing sales and starts—on a floor space basis—in the wake of more aggressive policy measures to boost the property market.

But there’s still little sign of a real recovery in consumer confidence to where it sat before the pandemic, and before the housing-market collapse. And with Country Garden, one of China’s largest developers, now fighting for survival after failing to pay its dollar debt, the challenges to a sustainable recovery of confidence in the housing market remain formidable. Sales at China’s top 100 property developers were only marginally better in October than in September, according to data released Tuesday by China Real Estate Information.

It’s too early to push the panic button, but the October lending and official real-estate data due later this month could be telling. At the very least, it’s still very early to conclude that China’s economy has won the many battles—against household pessimism, shambolic government finances and multinationals’ “de-risking," to name just a few—needed to put growth back on a sustainable footing.

Write to Nathaniel Taplin at nathaniel.taplin@wsj.com

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