The two newly released manufacturing surveys confirm the gradual reversal of the recent slowdown of China’s economy. The official Purchasing Managers’ Index reached an 18-month high of 51.4 in October. The HSBC/Markit final PMI for the month rose to a seven-month high of 50.9. A reading above 50 indicates expansion in the manufacturing sector, while a reading below 50 indicates contraction.
The key difference between the two is that the official PMI, which is weighted more towards bigger and state-owned enterprises, showed continuing weakness in new and export orders. That was less apparent in the HSBC/Markit survey, which is weighted towards smaller and private-sector firms. The question the difference poses is, how strongly will the momentum of the recovery carry through the rest of the fourth quarter. Strongly enough, we would hazard, for GDP growth to at least meet the official target of 7.5% for the full year.
So far China’s new leadership has resisted short-term fixes to the country’s slower growth and held true to the need for deeper structural reforms to rebalance the economy. The latest measure of economic activity — HSBC’s flash purchasing managers’ index for May — may test their resolve, but not, this Bystander hazards, break it.
The May reading, at 49.6, down from April’s 50.4, was the lowest in seven months. More germanely, it fell below the 50 mark that delineates expansion from contraction. The modest expansion of manufacturing activity that has been seen since the slowing economy started to pick up steam again last autumn has been replaced by modest contraction. The second area of concern is that the weakness seen by China’s manufacturers in global demand for their goods and services seems to have spread to their domestic customers.
The difficulty for policymakers is that they have limited scope even for short-term fixes. Monetary policy is already easy and loosening it further or splashing out on another round of government funded infrastructure investment spending risks further inflating property bubbles and an already concerning local government debt overhang. At best there is likely to be spot stimulus measures applied where local employment conditions put social stability at risk.
One of the vehicles for this might be the new leadership’s urbanization plans, a centerpiece of its long-term management of moving China to a slower growth trajectory than the double digit annual growth it averaged over the past three decades. While the plan will take years to implement, it could set a tone for structural reform that would have a more immediate effect on economic confidence, and prevent GDP growth for the year falling below 2012’s 7.8%, its slowest in more than a decade.
The pause for breath in the recovery of China’s economy from the 2011–12 slowdown has extended for another month. The official purchasing managers’ index (PMI) for April fell unexpectedly to 50.6 from March’s 50.9. The forecast had been that it would break above 51. The reported number reflects a similar softening reflected in HSBC’s preliminary PMI number announced last week.
The official indicator best reflects activity at larger enterprises and HSBC’s that at small and medium sized ones, suggesting the soft patch is being experienced across the economy. That, indeed, seems to be happening across the global economy, too, affecting demand for Chinese goods: the new export orders sub-index in the April official PMI fell below the 50 level that delineates expansion from contraction; the same sub-index in HSBC’s version was also down.
For its part, Beijing is already signaling that it will fall back on its old favorite — spending on infrastructure investment — to pep up GDP growth in the second quarter, despite that being a drag on rebalancing. Inflationary concerns, particularly continuing rising property prices, give policymakers little to no scope to ease monetary policy further. First-quarter growth came in at 7.7% down from 7.9% in the final quarter of 2012. As things stand, second-quarter growth could come in at 7.5%, which is also the official full-year target for 2013.
This Bystander is not as surprised as some to see the December HSBC Purchasing Managers’ Index for December showing further expansion of China’s economy. Infrastructure spending and cautiously easier monetary policy have been visibly kicking in since September.
The final reading of the December HSBC PMI was 51.5, compared to a preliminary reading mid-month of 50.9 and November’s 50.5. A reading above 50 indicates expansion. Domestic demand is making up for sluggish overseas markets; the new export orders sub-index for December fell to 49.2 from November’s 52.1. That manufacturing is growing at its fastest pace since May 2011–and the official PMI due tomorrow will tell much the same story–will give policymakers in Beijing good reason to believe that the momentum of an accelerating pace of expansion can be carried into 2013.
How far and how fast will they let it run? The People’s Bank of China on Saturday flagged the risk of defaults in the shadow banking system. Inflation, a persistent concern, is beginning to edge up again. If either concern is present beyond the first quarter of 2013, some tightening is likely to start.
The long-awaited sign that China’s economic slowdown has finally bottomed out, or just another step towards that trough? HSBC’s Flash China manufacturing purchasing managers’ index (PMI) stabilised in September, ticking up to 47.8 from its nine-month low in August of 47.6. There was also a broad steadying across the sub-indexes, though the one that measures output fell to its lowest level in 10 months.
The numbers are still on the contraction side of the 50 mark that separates contraction from expansion. The overall index shows that new business remains sluggish and the running down of inventories is taking longer than might have been expected. Stimulus measures – tax and interest rate cuts, expanded bank lending and liquidity injections and a green light for bringing forward $150 billion in infrastructure investment — may be taking effect, but gradually.
Inflation showed signs of reviving in August, after hitting a 30-month low in July. Policy makers will be wary of taking further stimulative measures unless they absolutely have to. HSBC’s Flash PMI lets them hold fire for another month.
It doesn’t seem that the Hu-Wen leadership will get to handover to their successors an economy that has put slowing growth behind it. The hit the global economy has taken from the eurocrisis has hurt China’s vast manufacturing industry harder and longer than expected. It now looks as if the slowdown in growth will last well into the third quarter, possibly beyond.
Both the official and the unofficial HSBC purchasing managers’ indices for August were bad news in that regard. The official index fell below the 50 mark dividing expansion from contraction for the first time since last November. HSBC’s version, which reflects more small and medium sized firms than the official index and already below 50, hit its lowest point since March 2009.
Talk of further policy measures to boost growth has intensified. Two interest rate cuts and central bank injections of liquidity via large-scale reverse repos have not had the hoped-for impact. As central bankers in the U.S. and Europe have found, it is not the price or availability of money that is the drag on recovery, it is lack of demand.
China’s policymakers remain wary of aggressive easing and stimulus via infrastructure spending for fear of rekindling inflation and the property bubble that they worked so hard to reduce. The debt overhang from the last round of stimulus, after the 2008 global financial crisis, casts a dark and deeply concerning cloud over policymakers.
This Bystander still thinks they will remain cautious about further easing, hoping that they will be able to get though the year with better than the 7.5% GDP growth that was set as the annual target, all be it by the skin of their teeth. That they were intending to pass on a plumper cushion of growth while setting expectations the longer term structural slowing of the economy will be conveniently forgotten for the moment.
Another sign that the slowdown in China’s economy hasn’t yet bottomed out: The official Purchasing Mangers’ Index (PMI) for July unexpectedly fell to 50.1 from June’s 50.2, it’s lowest level in eight months and barely above the 50 level that separates contraction from expansion. Meanwhile HSBC revised its unofficial PMI, which is weighted more towards activity in small and medium sized manufacturing companies. July’s figure was cut to 49.3 from the 49.5 initially reported last week. That is still up from June’s 48.2, however, albeit in contractionary territory.
The government has been easing monetary policy and allowing bank lending to rise to fund brought-forward infrastructure spending, saying growth and stabilizing the economy is its main priority. It does not want to go so far in that stimulative direction, however, that it risks reinflating the property bubble it has worked so hard to deflate gently. It has been refraining from further interest rate cuts and committing to public-sector infrastructure investments it can’t dial back on in the hope that growth will pick up in the third quarter and that it can ride through the short-term unemployment pressures. Numbers like these latest PMIs tax its patience.