(Reuters)A participant in Liu Bolin's recent project in Beijing waits for what's next.
Hidden beneath the surface of China's new, barely-passable manufacturing report on Tuesday was a worrisome indicator on employment. An indicator that touched Premier Li Keqiang's "red line," as Bloomberg economist Tom Orlik put it.
China's manufacturing purchasing managers index (PMI) for March came in at 50.1, up from 49.9 the month before. It beat economists' expectation for a decline to 49.7. Anything above 50 means this massive sector is expanding.
So, good news right?
Not necessarily.
March is a big year in China as factories get back to work after the Chinese New Year. So the fact that manufacturing numbers didn't contract isn't totally surprising. Plus, as Orlik pointed out, what Chinese officials are really worried about is the labor market, which is captured as a sub-index in the report.
"An important point to note in the PMI data is the employment indexes," Orlik wrote in a recent note. "Premier Li Keqiang ended the National People’s Congress with a promise to act on growth if employment started to slide. The PMI data provides the only high-frequency reading on employment. It shows employment contracting in both the manufacturing and non-manufacturing sectors."
According to the report, the employment sub-index was at 48.4, which means contraction.
China knows things are getting bad
On Sunday, the Chinese government openly admitted for the first time that things aren't going so well. In order to transition the country's economy from one based on foreign investment to one based on domestic consumption, the government's allowed the economy to slow.
But it's becoming increasingly clear the economy is slowing too fast. And the government is scrambling.
"The policy response to slower growth has already started," Orlik continued. "The central bank has cut the down-payment requirement for second-home buyers. Open market operations have swung from drains to injections, bringing interbank rates down slightly."
Many analysts, however, agree that this response doesn't go far enough — not by a long shot.
(Feng Li/Getty Images)
The Chinese economy needs another response
China's problem is that it needs cash. Corporate profit margins are thinning and the domestic population isn't spending enough to keep the economy greased.
As Societe Generale analyst Wei Yao points out, statistically what really matters to the economy is the growth of cash and coins in circulation. That's called "M0" growth.
(Societe Generale)
"If we agree that 5-6% M0 growth is needed to avoid sharp economic deceleration, the People's Bank of China has to take more action," she wrote in a recent note.