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Trade War Taking Its Toll As Chinese PMIs fall Into Contractionary Territory

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The damaging effect of the trade war on the Chinese economy was visible again this week in the latest economic data for the world’s second-largest economy. The Chinese Caixin manufacturing PMI for December fell to 49.7 from the prior month’s 49.7 reading.

The key point here is that the reading is now below the neutral level of 50, indicating a contraction and backing up a similar decline seen in the official manufacturing PMI for the month which fell to 49.4 from 50 prior.

trade war

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Domestic Demand Under Pressure

The breakdown of the data showed the new orders component of both the readings falling below the neutral level, also indicating that not only is the export sector facing a contraction in manufacturing, but also the broader domestic manufacturing sector in general.

Chinese Data Weakening Across the Board

Coming on the back of a decline in industrial profits for November, which fell to 1.8% year over year from 3.6% in October, as well as weaker retail sales (8.1% November and 8.6% October), the data confirms the general negative shift taking place across the economy.

Chinese Government to Step Up Fiscal Plans

The trend in Chinese data suggests that not only has the trade war harmed export sector growth but that it has also weakened export-linked supply chain companies, weighing on domestic demand.

If domestic demand doesn’t quickly receive a boost from fresh fiscal stimulus, further deterioration will take place which will then start to erode job security and create even bigger problems within the economy.

With this in mind, we are likely to see the Chinese government stepping up the pace with the delivery of its planned infrastructure investment in the economy.

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