Saturday, 05 March 2016 00:00

Is China Heading Towards Recession?

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As China’s growth continues to slide, there is a fear that the country is potentially heading towards recession. It was reported on March 5, 2016 that China expects full year GDP growth to be in the range of 6.5% to 7.0%.

However, if the trend in the country’s manufacturing and non-manufacturing PMI is observed, there is a fear that growth in China will be below 5% in the best case scenario and that the country is headed towards recession in a bear case scenario.

China’s manufacturing PMI for February 2016

Chinas Manufacturing PMI February 2016

While China’s manufacturing sector has been in recession since August 2015, the manufacturing PMI has slumped in the last two months and is indicative of renewed downturn in the country. However, the manufacturing sector was unlikely to be the growth driver and my focus is one the non-manufacturing PMI.

China’s non-manufacturing PMI for February 2016.

Chinas Non-Manufacturing PMI February 2016

China’s non-manufacturing PMI is at lowest levels in the last 12 months and the big worry is that the non-manufacturing sector has also witnessed sharp decline in the last two months.

It is important to note here that there was a global equity market meltdown in January 2016 and it has coincided with China’s renewed downturn.

Clearly, there are challenging times ahead for risky asset classes as China’s downturn will have meaningful implications on global economic growth. Further, China has attempted to arrest the downturn by currency depreciation and renewed currency war (very likely) is not good for the global economy.

Just from a risky asset class perspective, a global slowdown can be good news if central bankers globally react the usual way by flooding the financial system with liquidity. However, the way the global economy is trending, it would be best to maintain a cautious stance.

 

Chart Source: National Bureau of Statistics China

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