3 Reasons Why China Should Ease Again

Now that the world’s second largest economy is still in a slump, another round of easing could be necessary to help China get back on its feet. Take a look at these reasons why the China should ease again:

1. Deeper Contraction in Manufacturing

A few days ago, HSBC reported another contraction in the Chinese manufacturing sector, as the PMI (purchasing managers’ index) fell from 48.2 to 47.7, which is its 11-month low. This marks the third consecutive month that the HSBC PMI stood below 50.0, which means that the Chinese manufacturing industry has been slowing down for the past three months!

A closer look at the components of the index would reveal that the employment sub-index tumbled to 47.3. That’s its lowest level in more than four years! With a weak labor market, consumer spending and overall growth could be in danger as well.

2. Below-Target GDP Growth

For the second quarter of the year, the Chinese economy grew by only 7.5%, lower than the projected 7.7% GDP growth. It’s bad enough that the 7.5% annualized GDP rate is way below the double-digit figures seen during China’s glory days, but what makes things worse is that Chinese economic growth is about to miss government targets as well.

Earlier this year, the Chinese government already trimmed their annual growth target from 8% to 7.5% for 2013. However, given the ongoing slowdown in manufacturing and hiring, China could still be in for a disappointment.

If the Chinese economy fails to reach the government’s 7.5% annual GDP goal, Premier Li Keqiang would be the first premier to miss the growth target since 1998. My hunch is that Mr. Li won’t stand idly by and simply watch this happen, as consistently weak economic data could prompt government intervention.

3. Challenge of Rebalancing

It’s no secret that China is still struggling hard to rebalance its economy from being an export-driven one to being more dependent on domestic growth. The country’s drive to lessen its reliance on international demand couldn’t have come at a better time, as the global economy is dealing with a slowdown.

The problem is that structural weaknesses in China, such as the existence of a shadow banking sector and the unsustainability of several business investments, are preventing domestic economic activity from taking flight.

Aside from pumping up liquidity, the People’s Bank of China and the Chinese government could also implement financial reforms to ensure that the additional credit is channeled towards stronger domestic consumption.

Until then, the downturn in China’s economy activity could continue to take its toll on its trade partners, such as Australia and other commodity exporters. How long do you think the slowdown in China would last? Let us know by voting through the poll below!