China’s December PMI: A Caution

Our usual caution about extrapolating from a single month’s economic indicator applies more than ever to December’s official purchasing managers index. Though the index unexpectedly reversed its decline, rising to 50.3 from November’s 49, it is still barely above the 50 mark that divides contraction from expansion. The equivalent index compiled by HSBC, which reflects activity at smaller manufacturers than the official index, also rose but remains below the 50 mark.

Neither provide sufficient evidence to support an assertion that China’s economy has avoided a hard landing. The weakness of demand in the U.S and the threatening return of recession in eurozone-debt troubled Europe continue to cast a dark shadow that rising exports to developing economies and domestic consumption can not fully alleviate. The question is not, has China’s economy turned a corner, but what will be the extent of its slowdown.

With inflation slowing, if still elevated, and growth next year possibly falling below 9% for the first time in a decade the pendulum is swinging towards more expansionary monetary policy. But it is moving slowly. Policymakers are aware of the risks that stimulus money pose to the property market and over-indebted local governments. They will want to wait until they are sure that they have no alternative.

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