China’s Manufacturers Flash A Warning

HSBC Purchasing Managers Index, 2009-2011As straws in the wind go, it is scarcely encouraging. The flash reading on the HSBC purchasing managers index (PMI) for November is signaling that China’s manufacturing output will switch to contraction from growth. At 48.0, the number is down from 51.0 in November and its lowest since March 2009 though still well above the low in the depths of the global financial crisis in 2008 (see chart; the black line represents November’s flash forecast).

Now, this is the preliminary estimate, and the HSBC PMI overweights small and medium sized businesses against the large state owned enterprises that generate the majority of the economy’s output compared to the government’s index. So the final number and the government’s index, both due early next month, may turn out a tad higher, though it must be said that the flash reading usually turns out to be pretty accurate.

Whether either number can creep above the 50 level that marks the dividing line between growth and contraction will weigh on policymakers considering whether to turn their “fine tuning” of monetary policy into something more accommodating, albeit not as heavily as the prospects for demand in China’s largest export market, debt-crisis embroiled Europe, and domestic inflation, which though off its peak remains persistently high. Perhaps surprisingly, the flash PMI number suggests that export orders are holding up better than orders overall, suggesting that the policy tightening of earlier this year is still working its way through to the economy overall.

Earlier this week, the World Bank raised its forecast for China’s GDP growth this year to 9.1% from 9.0% though said it expected a slowing to 8.4% growth next year in the face of the drop of global demand. That pace of growth would be  at the upper end of what the PMI is now signaling.

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