Do we see positive signs for the trade balance in the latest CLSA Purchasing Managers’ Index (PMI)? Although the manufacturing sector continued to expand thanks to a steady stream of new orders, most of the demand came from the domestic market. Export orders saw only a modest rise, which is seen as evidence that the removal and reduction in tax rebates on a wide range of exports is having its desired effect.
New orders were certainly at nothing like the levels recorded in May and June when manufacturers were rushing to get business done ahead of the tax changes.
These changes were brought in ahead of this summer’s round of US-China trade talks in Washington – an attempt to appease the hawks who were squawking about China accounting for the largest portion of America’s record trade deficit. Removing the tax rebates would push up export prices as suppliers moved to protect their profit margins, thereby making Chinese goods less financially attractive. Less exports means a lower trade surplus.
This is how the theory goes and, according to the CLSA figures, there may be some truth behind it: Output prices are at their highest in a year. However, the key driver of the price inflation is believed to be a spike in input prices. Respondents to the CLSA survey pointed to oil, steel, foodstuffs and transportation as areas where they are experiencing significant cost increases.
The verdict for foreign buyers in China is not a happy one. “Profit margins will collapse in China if any weakness in top line sales emerge over the next few months on the back of a global credit crunch,” said CLSA Chief Economist Dr Jim Walker.