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Trade war

China business confidence erodes as key index contracts

Trade tension pushes manufacturing PMI into negative for first time in two years

Workers at a factory in Xingtai, China, assemble toy cars. The country's manufacturing sector is under pressure.   © Reuters

BEIJING -- A key metric for the health of China's manufacturing sector is showing contraction for the first time in more than two years, more evidence that the Chinese economy is slowing under the weight of the trade war with the U.S.

China's official manufacturing purchasing managers' index stood at 49.4 points for December, a 0.6-point drop from November, according to Monday's release. The index has fallen for four consecutive months to a level not seen since February 2016.

The latest figure, based on a survey of production and new orders at 3,000 enterprises, puts the PMI below the boom-or-bust line of 50 for the first time in two years and five months.

Some of the biggest drags on the PMI are the subindexes on new import and export orders. The new export subindex shrank 0.4 point from November to 46.6 points. The indicator has hovered under 50 points for seven straight months. The new import subindex receded 1.2 points to 45.9, its sixth consecutive month below 50.

Ever since U.S. President Donald Trump imposed tariffs on Chinese imports in July, the two sides have been engaging in tit-for-tat tariffs culminating in a full-fledged trade war. These measures have affected a broad range of sectors in China that engage in import and export, informing the soured sentiment on business in general.

The publisher of the PMI, the China Federation of Logistics & Purchasing, says there is significant downward pressure on the economy, and that the pressure is expected to strengthen in the coming months.

"It has become increasingly clear that the Sino-U.S. trade war has had a negative effect on exports, and the growth of consumption, investment and other internal demand indicators has become unstable," said Zhang Liqun, an economist at the Development Research Center, a think tank under China's State Council.

During the key Central Economic Work Conference, which ended Dec. 21, top Communist Party officials signed off on an aggressive stimulus package, headlined by an expanded tax relief program, to prop up the economy in 2019.

"They will need to quickly implement the agenda, and have the program demonstrate results going toward stabilized growth as quickly as possible," said Zhang.

Beijing and Washington are preparing to negotiate a compromise to the trade war. The U.S. has set a March 1 deadline for a resolution. During a phone call on Saturday, Chinese President Xi Jinping told Trump that he looks forward to coming together to swiftly reach a "win-win" agreement that would be in the interest of the global community.

China is also taking some steps that seem to respond to U.S. demands. For example, a new appeals court will begin hearing intellectual property disputes in January. This has added to speculation that the Chinese leadership is eager to reach an agreement with the U.S. under pressure from the economic slowdown.

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