China’s Manufacturing Boom Loses Steam. That Will Hobble Economic Growth Even More.

Signs that China’s manufacturing boom may be losing steam is a welcome sign for economists who recommend more balanced growth and foreign officials who call for China to thin its oversupply of goods.

But it’s unwelcome news for industrial producers who are used to decades of vigor in the sector—one in which the government rescues only in rare bad times.

“Our company is seeing order declines for the first time in years [outside of the pandemic], said Wu Xiaoling, CEO of private Beijing-based Sanshi Tech, which makes 3-D printers for commercial drones.

“We’re not quite used to this,” he told Barron’s.

Since the pandemic ended, consumption had remained stubbornly subdued, with factory output, the longtime engine of growth, continuing to be the main source of expansion for the world’s second-largest economy.

But recent data showed a leap in retail sales—a proxy for domestic consumption—rising to 3.7% year-over-year in May from a mere 2.3% the month before. This far outpaced forecasts from economists who have witnessed the sector languish since the pandemic.

Meanwhile, industrial production, a gauge for manufacturing, fell short of expectations, weakening to 5.6% from the same period last year, from 6.7% in April. Factory output had softened in a previous government measurement as well, with the official Manufacturing Purchasing Managers Index (PMI), falling into contraction for May from expansion the month before.

More time will be needed to see whether this shift becomes a trend. But a painful rebalancing is needed for China’s lopsided economy, even if Chinese household consumption is still below that of the rest of the world by numerous percentage points of GDP, Michael Pettis, a senior fellow at the Carnegie Endowment, told Barron’s from Beijing.

China can choose how much pain is dealt to manufacturers if and when rebalancing becomes more entrenched, some say. “One way involves a painful and potentially disruptive collapse in production, as occurred most famously in the U.S. in the early 1930s, when it had to try to resolve its huge trade surplus in a contracting world economy exacerbated by beggar-thy-neighbor trade and currency policies,” said Pettis. “The other way is to boost domestic demand as quickly as possible.”

The government has continued to pay lip service to boosting consumer demand but has yet to take direct measures, such as cash handouts, as the West did to boost consumption when it collapsed during the pandemic.

But anemic manufacturing, alongside continued tumbling property prices, spells further hobbled growth for China.

Sanshi Tech’s Wu said that while he is hoping for government assistance if factory activity continues to weaken, he isn’t holding his breath. China’s policymakers show no sign of changing the playbook for a sector spoiled by a massive global export surplus in cheap industrial goods.

China is currently producing more goods than it can absorb by itself. In the past it did what it does best—exported them. But now the U.S. and Europe finally appear united in curbing the exports not just of sensitive technologies, but of goods that threaten native industries.

The Biden administration has expanded on billions of dollars worth of Trump-era trade restrictions against Chinese imports. The European Union has decided to impose punitive tariffs on Chinese electric cars.

The restrictions on Chinese goods, which will leave China with warehouses full of unbought merchandise if domestic demand doesn’t strengthen, have now lurched further into the geopolitical realm.

The head of NATO has said that China should be punished for supporting Russia’s war in Ukraine. Jens Stoltenberg said Beijing was “trying to get it both ways” by supporting Russia’s invasion while simultaneously attempting to maintain relationships with European countries. “This cannot work in the long run,” Stoltenberg said during a visit to Washington, adding that “allies need to impose a cost. There should be consequences.”

All of this bodes poorly for many of China’s manufacturers. Another Chinese entrepreneur told Barron’s he is seeing a slowdown in orders at his company and fears export restrictions will leave him with no one to sell to.

“I hope recent troubles are a fluke,” said Li Ming, head of Chengdu-based Feihong, which makes small parts for cars and recreational aircraft. “Otherwise, we’re in trouble.”

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