China: What the Divergence Between Hard and Soft Data Means - Production Expansion Without Demand Continues, Market Optimism May Need Correction: Asia Trends

Overview

An analytical report published by Toru Nishihama, Chief Economist at Dai-ichi Life Research Institute, on "China: What the Divergence Between Hard and Soft Data Means". The report sounds an alarm about the current state of China's economy where production expansion continues without accompanying demand, and warns against overly optimistic market views. ## Key Points ### 1. Report Overview - **Author**: Toru Nishihama (Chief Economist, Economic Research Department, Dai-ichi Life Research Institute) - **Publication Date**: June 30, 2025 - **Analysis Subject**: Divergence between China's hard and soft economic data - **Main Themes**: U.S.-China relations, Trump tariffs, China's economic reality ### 2. Current State of U.S.-China Relations - **Trade War History**: - U.S. imposed additional tariffs on automobiles, steel and aluminum products - Mutual tariff policies escalated into trade war - Temporary tension easing after U.S.-China talks in Switzerland - **Worst period has passed but uncertainty continues** - **Rare earths as bargaining chip**: China dominates majority of global refining capacity - **Future outlook**: Expecting repetition of Trump's "threats (TALO)" and "backing down (TACO)" ### 3. China's Manufacturing PMI Analysis (June) - **Composite Index**: 49.7 (up 0.2pt from previous month, below 50 for 3 consecutive months) - **Production**: 51.0 (active but without accompanying demand) - **New Orders**: 50.2 (barely above 50) - **Export New Orders**: 47.7 (notable weakness in external demand) - **Employment**: 47.9 (labor-saving investments reducing job creation capacity) ### 4. Non-Manufacturing PMI Analysis (June) - **Composite Index**: 50.5 (up 0.2pt from previous month, barely above 50) - **Construction**: 52.8 (solid, supported by public investment) - **Services**: 50.1 (clear disparities between sectors) - **Strong Sectors**: Logistics, telecommunications, IT, finance-related - **Weak Sectors**: Retail, transportation, tourism, food service, real estate ("experiential consumption" remains sluggish) ### 5. Domestic Demand Reality - **Superficial Resilience in Personal Consumption**: - May retail sales accelerated unexpectedly - However, driven by policy support effects with questionable sustainability - Auto demand plateauing, demand shifting to durable consumer goods - **Structural Problems**: - Employment anxiety constraining consumption - Real estate price adjustments continuing - Negative wealth effect pressuring personal consumption ### 6. Divergence Between Production and Demand - **Production expansion without demand**: Risk of inventory buildup - **Export plateau**: Unable to compensate for U.S. export decline in other regions - **Negative employment impact**: Labor-saving investments stalling job creation - **Concerns about statistical reliability**: Question marks over robust hard data ### 7. Future Outlook and Risks - **Excessive optimism should be avoided**: Growing divergence from reality - **Policy effectiveness limits**: Demand stimulus effects are temporary - **Challenges for sustainable recovery**: - Delayed employment improvement - Continued real estate market adjustment - Difficulty escaping external demand dependence - **Warning to financial markets**: Optimistic views may need correction ### 8. Policy Implications - **Impact on China export-dependent countries**: Unlikely to provide tailwinds - **Spillover to emerging and resource-rich economies**: China's import sluggishness weighing down - **Impact on global supply chains**: Structural changes in progress This report provides a detailed analysis of the divergence between China's superficial economic numbers and reality, sounding an important alarm against excessive market optimism. It is particularly valuable in pointing out the severity of structural problems such as production expansion without demand and declining job creation capacity.