Posted By Paul Tate, August 25, 2015 at 1:20 PM, in Category: Manufacturing Leadership Community
We’ve all been there. You go into a meeting and by the time you come out, the world has changed.
That’s what it must have been like for the gathering of senior-level Chinese officials and state industrialists at a special meeting in Beijing last Friday as they listened to Lu Bingheng, a researcher at the Xi'an Jiaotong University, review the current state of China's advanced manufacturing sector and extol the virtues and future growth potential of the latest 3D printing technologies.
Outside the meeting hall, however, the world was spinning into financial turmoil. By mid morning, the main Chinese stock index had dropped by 2 per cent. The Australian dollar was losing ground, and financial jitters were rapidly infecting stock markets worldwide.
Why? Only a week after the Chinese government took urgent steps to devalue the Chinese Yuan currency in an effort to boost the economy by making exports cheaper, came the sudden news on Friday morning that China’s manufacturing sector had fallen deep into contraction in August and is set to record its lowest Manufacturing Purchasing Managers’ Index (PMI) figure for the last 77 months.
The Flash (preliminary) China Manufacturing PMI, released by global industry analysts Markit Economics and Chinese business media group Caixin early on Friday, indicated that China’s overall August manufacturing performance had slipped from an already poor 47.8 in July, to only 47.1 in August, a six and a half year low. China’s Manufacturing output sub-index, meanwhile, was even weaker – falling from 47.1 in July, to just 46.6 this month.
A PMI figure over 50 marks industrial expansion; a figure below 50 signifies industrial contraction.
By Monday, now termed Black Monday by many analysts in China, things got even worse as panic spread and the Shanghai Composite Index dropped by 8.5%, followed by a 7.6% fall on Tuesday. Estimates put China’s total stock market loss in value at around $4 trillion since its peak in June. China’s government reacted on Tuesday with more financial measures – cutting the benchmark interest rate (the fifth time since November) and freeing banks to lend more. U.S. and European markets also took a bruising over the weekend in the wake of the Chinese run, but now seem to be bouncing back as global markets regain some composure.
Of course the August China Manufacturing PMI figure is only part of the developing story of slowing growth in China. Nevertheless, it was clearly one of the key triggers for the subsequent global stock market upset over the last few days.
So perhaps there are two aspects of this event that are of significant importance for the manufacturing industry worldwide.
Firstly, such recent events clearly show the rising degree of recognition of the manufacturing sector as a true engine, and measure, of national prosperity. Following all the financial sector woes and banking collapses of the late 2000s, global analysts and financial markets are now putting far more emphasis on manufacturing performance as a measure of economic growth than they have done for many years. The triggering of this recent stock market chaos is testament to manufacturing’s rising global significance.
Secondly, China’s problems suggest that overall growth prospects for the rest of the year and into 2016 may not be as strong as many manufacturers had first hoped. Despite rising consumer wealth and an increasingly affluent population in many regions, China now seems unlikely to hit its target 7% growth rate for 2015. Even if it did, it would still be the slowest pace for the world’s second largest economy in over 25 years. Many smaller global economies are also heavily dependent on China as both a source of products and as a market for their commodities, so such a slow down would have a rippling effect worldwide.
So where is growth going to come from for manufacturing in the next 18 months? Many of the world’s emerging markets have also seen growth slowing this year, and while the major advanced economies are more stable, their growth rates tend to hover around low single digit rates and are nothing to write home about. Can China now find ways to help its manufacturing sector rebound substantially in the months ahead and help provide continuing stimulus to the global industry?
Back in Beijing at the meeting for officials and state industrialists on Friday, that’s exactly what Chinese Premier Li Keqiang seemed to be hoping for. Following the lectures on 3D printing and advanced manufacturing, Li stressed that China now needs to "make up for missing lessons" in industrial development which, though large in volume, lacks competitiveness.
Citing the ambitious national ‘Make in China 2025’ smart manufacturing initiative to transform the country’s industrial sector to higher value manufacturing launched earlier this year he said; "If we want to make ‘made-in-China’ products to compete with commodities from Japan, Germany and the United States, we need creative perceptions.”
"The stabilization and upgrading of the Chinese economy requires industrial restructuring and a new driving force in which intelligent manufacturing could be the key," added Li.
But that industrial initiative has a 10-year horizon and such changes won’t happen swiftly.
So, as those state officials left the Beijing meeting on Friday evening trying to balance thoughts of future 3D printing potential against current manufacturing contraction and sudden stock market turmoil, many may well have been wondering if advanced technological potential alone will be enough to turn China’s industrial tide in the months ahead.
Written by Paul Tate
Paul Tate is Research Director and Executive Editor with Frost & Sullivan's Manufacturing Leadership Council. He also directs the Manufacturing Leadership Council's Board of Governors, the Council's annual Critical Issues Agenda, and the Manufacturing Leadership Research Panel. Follow us on Twitter: @MfgExecutive
Chinese stock market will be stabilized on a standard level in a short run while Chinese IPI will probably stay on a single digit.