HONG KONG • US President Donald Trump's assault on trade with China is moving from tweeted threats and abortive talks to the real world.
China's purchasing managers' index (PMI) readings for last month, released last Saturday, showed a gauge of export orders tumbling into contraction, the clearest sign yet that the oncoming trade war is having a real, negative impact on growth. From Friday, the world's two largest economies are set to begin charging higher tariffs on each other's goods, marking a major escalation of the conflict.
That is focusing minds among policymakers in Beijing, as China now faces the tricky task of balancing support for an economy that was already slowing with its ongoing desire to curb excess credit. As the increasingly important service sector remains robust, there is little need to turn on the stimulus taps too strongly for now, provided the nation remains on track to hit the growth target of 6.5 per cent expansion this year.
"China's economy will slow down for the rest of the year, but we don't need to worry about any stall yet," said chief macroeconomy analyst Zhu Qibing at BOC International China in Beijing. "The key is how international trade and the dispute between China and the United States will evolve."
The manufacturing PMI stood at 51.5 last month, versus 51.9 in May, and the forecast of 51.6 in a Bloomberg survey of economists. The non-manufacturing PMI, covering services and construction, rose to 55, compared with 54.9 in May. Levels above 50 indicate improvement.
The sub-index of new export orders fell to 49.8 from 51.2, signalling weakening demand from other countries. Gauges for new orders and the backlog of orders also fell.
That decline was also seen in South Korea's June exports, which unexpectedly dropped. Part of the reason was one-off factors like fewer working days, but South Korea is a key supplier of computer chips and other components to China, which takes about a quarter of its exports. The Korean data comes out earlier than most other countries', so it is seen as an early bellwether for the health of global trade.
The sub-index of new export orders for June, down from 51.2 in May. This signals weakening demand from other countries.
A separate private PMI survey yesterday backed up the picture from the official data, with export orders moving further into contraction.
The China Federation of Logistics & Purchasing, which helps conduct the official PMI survey, explained in a statement how merely the threat of higher duties can have an impact on orders in advance.
"In previous months, companies expedited exports because they had foreseen this complicated situation of international trade," the federation said. "As the trade friction between the United States and China escalates, exports start to ebb."
The arrival of a bear market in the nation's leading stock exchange and the fastest slump in the currency since 2015's devaluation have already made it clear that investors are on edge. Now comes the question of how the People's Bank of China (PBOC) will follow through on last week's signal that it will be more supportive of growth, and whether the current "structural" approach - where targeted policy tweaks aim at specific sectors, like small business - will be enough.
It is only just over a week since the last supportive PBOC move, a cut of 0.5 percentage point in the amount of reserves that banks must keep. While that move unlocked about 700 billion yuan (S$144 billion), most of those funds were targeted at supporting a complex debt-to-equity swap programme aimed at cleaning up balance sheets.
In short, while economists forecast further cuts in the reserve ratio this year, it is not clear that they would be directly supportive of bank credit and therefore broader economic growth. China's frothy property market and elevated corporate debt level mean that simply juicing output via credit is not as easy as it once was.