China’s manufacturing becomes a casualty of US trade war

China is awash with data and most of it has been rather depressing. Just hours after the opening day of high-level trade talks concluded in Washington, the National Bureau of Statistics released a set of disappointing manufacturing numbers.

For the second straight month, the sector was in negative territory in January, a further reminder of why discussions are taking place between China and the United States in the Eisenhower Executive Office Building, which is next to the White House.

Vice-Premier Liu He’s delegation will reconvene on Thursday in the final session to resolve the impasse with the US team led by US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer.

At this stage, there was little evidence that Beijing would bow to pressure to deepen reforms or change its broader economic policy.

“China is open to and is actively pursuing some structural changes on its own, but the US should not seek to change China’s development model. That’s the bottom line,” Liu Ying, a research fellow at Renmin University of China’s Chongyang Institute for Financial Studies, said.

As for Thursday’s figures, last month’s official manufacturing Purchasing Managers’ Index, or PMI, was 49.5.

Slightly higher

This was slightly higher than December’s 49.4 when China’s factory activity fell for the first time since July 2016.

Indeed, a reading above 50 signals expansion, while one below represents contraction.

“That means the downward pressure on the Chinese economy is still significant,” Li Chao, an analyst with brokerage Huatai Securities, wrote in a note to the media.

“Companies are continuing to cut their stock proactively, a move that might not change until the fourth quarter of 2019, meaning weaker support for the gross domestic product.”

Earlier this month, the National Bureau of Statistics announced that GDP growth for 2018 slowed to 6.6%, a level not seen since 1990 as manufacturing stalled and consumer spending dipped.

To illustrate the depth of the downturn, smartphone shipments have taken a hit while car sales have plunged 5.8% in the past 12 months to 22.35 million vehicles. This was the first annual decline in more than 20 years.

On Tuesday, the National Development and Reform Commission unveiled a raft of measures to kickstart the stalled auto sector.

Red tape will be cut to boost the second-hand market, while “appropriate” subsidies will be rolled out by the state planning body to expand rural car sales.

Auto sales

“Long-term auto sales are still the main factor driving consumption growth,” Wang Bin, the deputy director of market operations at the Ministry of Commerce, said, reflecting Beijing’s anxiety about these big-ticket items.

Still, the key to turning around China’s sluggish economy will be resetting the strained “relationship” with the US after a bitter and costly trade war.

Even if an agreement can be reached, the crucial issues which have been put on the table by Washington, such as intellectual property violations, forced technology transfer and Beijing’s state-subsidies model, will take time to be resolved.

“Nothing significant is going to happen,” Steve Okun, a senior advisor at consulting firm McLarty Associates and a board member of the American Chamber of Commerce in Singapore, told CNBC.

“We’re not going to know if those structural changes are going to take place [in China] … that can’t happen by March 1 [the deadline for a deal]. But because the atmospheric around these trade talks are likely to be very positive, especially when President [Donald] Trump meets Liu He, the markets are going to take that as a sign that progress has been made. But there is still a very long way to go,” he added.

In the meantime, distressing data continues to flow from the National Bureau of Statistics’ headquarters in Beijing’s Xicheng District.