Even China's mighty manufacturing sector is having a hard time escaping the beast known as uncertainty in difficult financial times. Business reports point to growing concerns about slowing demand for Chinese products, particularly in key European and US markets.
Electronics and textiles executives recently told Reuters that, despite China's strong export data in July, they're expecting a drop-off in the coming months. The anticipation is that orders will slow down — and could be cut before Christmas — as Western shoppers keep a tighter lock on their wallets. Also, an appreciating yuan (along with rising labor and raw materials costs) makes exports less attractive in dollar and euro zones.
Sentiment on Wall Street and the euro-zone's preliminary August PMI report echoed this feeling. A Dow Jones article cited Chinese Commerce Ministry spokesman Shen Danyang as saying that China's trade surplus is expected to keep shrinking in 2011, and July's surprise jump in trade surplus was due to rising export prices and lower global commodity prices. China's trade surplus widened significantly in July to $31.5 billion, its highest monthly level since January 2009, as export growth accelerated. The surplus was up from $22.3 billion in June.
In Europe, the first peek at how the manufacturing sector is faring this month in the 17-nation euro region has some mixed news, but observers think it points to a weaker third quarter.
Manufacturing activity contracted in August, according to MarketWatch's read of preliminary purchasing managers index data released Tuesday. The PMI fell to 49.7, down from 50.4 in July, but was above the forecasted 49.5. Fifty is the dividing line marking growth and contraction.
None of this should come as a total shock. It was only a matter of time before the effects of what looks to be another global slowdown reached the Asian tiger's shores. As Matt Sheerin, a supply chain expert and senior equity research analyst and managing director with investment firm Stifel Nicolaus & Co., said during this week's EBN Dialogue: weak consumer and corporate spending, combined with an unclear demand picture, will keep most companies' stock traders and trade officials on nervous guard. He said:
- No. 1 consumer spending has been weak — particularly so in Europe, so concern is that it doesn't come back for a while. Second, slowing GDP could cause companies to take more cautious approach in IT upgrades and other cap ex investments. Bottom line is there is a ton of uncertainty out there and making everyone nervous — the stock market drop in last few weeks certainly is not helping. I would say that visibility into demand outlook seems to be as low as it has been in three years, so this will automatically prompt companies to be more cautious for a while. I also will point out that valuations of companies across the supply chain – public companies are quite low now, even on number cuts, and again this reflects quite negative sentiment from investors.
Given the murky picture for the next few quarters, more questions come to mind. What does a slowdown in Chinese exports really mean to the rest of the electronics supply chain? Will it make more difficult for components suppliers to work off inventory that's building up on their shelves? Will purchasers start looking elsewhere, like Vietnam or Indonesia, for cheaper goods? Let me know your thoughts in the comments.