China's Manufacturing Activity Slows in December as Trade Risks Grow

China's manufacturing activity slowed in December, as indicated by the PMI data, with the index coming in at 50.1, down from 50.3 in November. This slowdown in manufacturing activity can be attributed to several factors, including weak external demand, structural changes in the economy, and trade tensions. The slowdown in manufacturing activity has significant implications for global supply chains and trade networks, as well as for China's domestic consumption and investment in infrastructure and high-tech industries.

The slowdown in manufacturing activity has led to a decrease in exports, which can disrupt global supply chains that rely on Chinese products. For instance, in November 2024, China's exports to the US fell by 13.2% year-on-year (YoY), contributing to a 17.2% YoY decrease in US imports from China. This decline in exports can have a ripple effect on other economies, particularly those that are heavily reliant on trade, such as Germany and South Korea.

The slowdown in manufacturing activity can also affect global commodity prices, as China is a major consumer of raw materials. In 2024, the slowdown in Chinese manufacturing led to a decline in commodity prices, with the S&P GSCI Commodity Index falling by 14.5% YoY in the first three quarters. This decline in commodity prices can impact the economies of commodity-exporting countries, such as Australia and Brazil.

The slowdown in manufacturing activity has also led to a decrease in domestic demand, which has affected investment in infrastructure and high-tech industries. According to the data provided, investment has shown signs of deceleration, with its contribution to GDP dipping from 1.5 percent in 2023 to 1.3 percent in the first three quarters of 2024. This deceleration in investment can be attributed to the weak domestic demand and sluggish growth of industrial production, which has created overcapacity and exacerbated deflationary pressures.

The slowdown in manufacturing activity has also led to a decline in credit demand from both Chinese households and corporations, resulting in a balance sheet recession. This contraction in balance sheets is adversely affecting consumption and investment, further exacerbating the economic slowdown. In response to this challenging environment, the government has implemented measures to stimulate borrowing by households and corporations, with monetary policy shifting towards a more expansionary stance. However, these measures have yet to produce significant results.

The slowdown in manufacturing activity has potential long-term effects on the economy. The decline in investment in infrastructure and high-tech industries may hinder China's ability to maintain its competitive edge in the global market and transition towards a more innovative and sustainable economy. Additionally, the slowdown in investment may lead to a decrease in employment opportunities, further exacerbating the economic slowdown.

To counter these long-term effects, the government has announced fiscal stimulus and plans to expand government public product investment. However, the effectiveness of these measures remains uncertain, and the government may need to implement more targeted policies to support the manufacturing sector and stimulate investment in infrastructure and high-tech industries.

In conclusion, the slowdown in manufacturing activity in China has significant implications for global supply chains and trade networks, as well as for China's domestic consumption and investment in infrastructure and high-tech industries. The government's response to this slowdown will be crucial in determining the long-term effects on the economy.