U.S.-China Factory breakup is hard to do

For the first time in a long time, U.S. factories seem to be doing worse than Chinese ones

By Nathaniel Taplin from Wall Street Journal

Chinese factories are suddenly looking a bit healthier. U.S. manufacturers aren’t. While some Beijing-based trade warriors may be gloating and Washington-based ones sulking, investors shouldn’t jump to conclusions.

The U.S. September factory purchasing managers index (PMI), released Tuesday by the Institute of Supply Management, was the worst since 2009. U.S. manufacturing has been trending down for a while and is likely to remain weak, thanks to a strong dollar and faltering global trade. Yet Tuesday’s alarming number can probably partly be explained by the General Motors Co. strike.

Meanwhile, across the Pacific, China has less to celebrate than it might appear. Headline numbers do look rosy—particularly the privately compiled Caixin factory PMI, which showed activity rebounding sharply to 51.4, its highest level since early 2018. China’s official PMI also bounced back, and its export subindex notched its strongest reading since April. Export orders are still falling but the pace of decline has now eased for three consecutive months. That is a particularly striking contrast with the U.S., where export orders dropped last month at a pace last seen during the 2009 financial crisis.

Chinese exports may be beginning to benefit from a cheaper yuan, which is now down over 6% against the dollar since April. But it also seems likely that Chinese exporters have spent much of the past two months trying to front-run new U.S. tariffs announced in August and set to come into effect in December. A similar pattern played out in last year. After big U.S. tariffs were announced midsummer, Chinese exports held up surprisingly well initially, but the strength proved temporary.

The other factor boosting China’s official factory gauge was oil prices. Producer prices rose a full 3.2 index points, far outstripping the overall index gain of 0.3 point. Unfortunately, input prices rose even further, implying deteriorating margins.

The big picture is that despite the damage to bilateral ties from the trade tensions, any decoupling of the U.S. and Chinese economies is likely to be a long and painful process. China’s export orders and the U.S. PMI still move pretty well together. The former has only moved above the U.S. PMI four times since 2009, including last month.

Unless there is a real truce between Presidents Trump and Xi this month—or Beijing is willing to risk an even bigger yuan depreciation—Chinese exports will probably be facing stiffer headwinds again by early 2020. Nobody is winning the trade war.