The Chinese economy is in a state of malaise as external demand sputters and the government implements measures to shore up investor confidence.
The country’s manufacturing industry grew at its slowest pace since 2011 in July, the latest indication that Beijing is having to take urgent measures to try to shore up faltering growth.
The slowest pace of growth of the manufacturing industry has been posted since August 2011, and is surprising in light of the recent strength of the U.S. economy and the effort to slow China’s growth.
Economists say the economy is battling a deceleration in the trade activity, and recent weakness in the Chinese stock market. China’s stock market fell about 20 percent since the end of May, the exact time when Beijing started implementing an anti-corruption campaign that has had an effect on banks, especially big lenders, and consequently the banking system.
Taken together, the perception that China is suffering from both sluggish external demand and over-capacity caused by a lack of investment and willingness among small and medium enterprises to expand has raised fears of deflation.
“The recent spike in the correlation between equity prices and short-term inflation expectations shows that cyclical pressures may be increasing,” according to Su Hao, China economist at BofAML Research.
The currency, the renminbi, is also having a disappointing run as investors try to forecast the fate of the currency regime. A surprise rate cut in July has done little to boost the value of the renminbi and instead sent the yuan sinking to a 21-month low versus the dollar.
The worry is that China’s leaders are reaching the limits of what they can achieve with what appear to be an effort to defend its massive trading deficit. China’s trade deficit with the U.S. in June was the largest in a quarter century, coming in at $32 billion.
Investors are now making bets that the Chinese central bank will have to cut interest rates, in a move that could mean a weakness in the renminbi.