CHINA


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Factory Activity Slows After Initial Burst. China’s factories have begun humming again after gradually reopening since March. But a steady decline in export orders is slowing the country’s economic revival.
The Caixin Manufacturing Purchasing Managers Index (PMI) rose from 49.4 in April to 50.7 in May. Crossing the 50 mark indicates factory activity is growing.
The survey’s sub-index of new export orders, however, moved from 33.5 to only 35.3 month to month, still lodged deep in negative territory, with new export orders contracting at a historically sharp rate.
TRENDPOST: While China’s burst of manufacturing enthusiasm after the lockdown brought people back to work, the continued global shutdowns gives those people not enough to do. China is likely to again lay off large swaths of the recalled workers and bring them back to factory floors later, at a slower pace tuned to the world’s gradual economic weakening.
China Service Sector Up. China’s Caixin PMI for the service sector jumped to 55.0 in May from 44.4 in April, its highest level in more than nine years.
A rank above 50 indicates growth in that sector.
In the U.S., the Institute for Supply Management’s index for the service sector climbed from in April 41.8 to 45.4 in May, cautiously up but still short of the 50 rating that would indicate growth. The IHS Markit’s survey for the sector saw the score bump up to 37.5 in May from April’s 26.7 record low.
Three of the 18 sectors tracked by the institute reported increased business in May but 17 of the 18 also reported fewer workers on the job.
China’s Sale of U.S. Treasury Securities Does Not Worry Analysts. China sold more than $800 billion in U.S. treasury securities in March, bringing its hoard down to $1.08 trillion. Some observers worry the sale presages an escalation in U.S.-China trade tensions: that China would dump more hundreds of billions of dollars’ worth of its treasury holdings, driving down bond prices and raising the interest the U.S. would owe its creditors.
As bond prices fall, their interest rates rise.
As a result, rising interest rates would slow U.S. economic recovery, doing more fiscal damage, and possibly harming President Trump’s chance of re-election.
Trump administration officials have suggested the prospect of canceling U.S. debt to China, prompting some Chinese economists to suggest flooding the securities market with U.S. treasury bonds.
Most analysts believe that neither drastic step will happen.
China sold its $800 billion in treasuries in March at a time when other countries sold $300 billion worth, all in an effort to raise cash to buoy national economies through the virus-related shutdown. The sale was not a strategic move but a short-term necessity, analysts point out.
Also, China has been shedding its U.S. treasury holdings gradually over several years in part to manage the value of its currency and prevent it plunging against the dollar and also as part of its’ transition to a consumer-driven economy.
Japan, no longer China, is now the biggest foreign holder of U.S. government debt.
“While [China’s] Treasury holdings have declined from their peak, this is not the result of structural disinvestment,” Deutsche Bank analysts said in a statement. “While this does have implications in the long run for the investor base for U.S. Treasuries, the pace of reduction… is likely to be very gradual.”

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