China's Economy: Heading For Trouble?
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China's Economy: Heading For Trouble?


Tuesday saw the release of the HSBC-Markit “flash” Purchasing Managers’ Index (PMI) for China.   The flash version of this PMI is released before all the data is in, and typically includes more than 80% of the data.  The survey includes survey information on output, new orders, new export orders, employment, prices for inputs and outputs, and inventories.

With the PMI system, any score over 50 indicates an expansion, whereas any score under 50 indicates a contraction.  The HSBC-Markit PMI is actually one of two main measures for China. The “official” PMI, measured by the China Federation of Logistics and Purchasing (CFLP), tends to focus more on larger and state-owned companies, whereas the HSBC-Markit index leans slightly more towards the private and small or medium enterprise (SME) portion of the economy, and also the export sector.

As with the disappointing first quarter GDP data for the country, the HSBC China April flash PMI has surprised many on the downside. The overall reading for this flash measure  came in at 50.5 for the month, compared to 51.6 for March.  The sub-indices for exports and employment showed actual contraction, whilst the measure for stocks of finished (unsold) goods increased.

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In the past, poor economic data has often (and perversely) caused Chinese stock markets to rise, as investors felt confident that the government would, as usual, ride to the rescue by easing monetary or fiscal policy.  However, the recent poor data from China has had quite the opposite effect. On the day the HSBC flash PMI was released, the Shanghai stock market actually fell by more than 2.5%.   This market reaction suggests that investors either believe that the government is less willing or less capable of riding to the rescue to reverse what seems to be another slowdown, an interesting change in perceptions.

Indeed the role and expectations of the government are paramount in China – official growth data rarely misses official targets, but this year the GDP growth target is lower – at 7.5%. Concerns about overcapacity, spiralling debts, financial risks in the shadow banking system and at the local government level are becoming daily stories in China’s lively economic media. No wonder investors are aware the government has other priorities which may conflict with GDP growth.

Global markets also suffered, especially in the commodity sectors for which China is such an important source of demand.  Copper and Silver fell during trading and other commodities also came under pressure.

Having mostly estimated too high for China’s 1Q 2013 GDP figure, many investment banks have been caught out again by this HSBC flash PMI data.  Naturally bullish, many of these analysts have now been swinging in the other direction, downgrading growth forecasts and issuing warnings about China’s prospects going forward. Whilst there is a chance that some are over-correcting in the wake of recent “misses”, it is clear that the world is adjusting to lower growth expectations in China.

In light of the urgent need for rebalancing and government proclamations that growth is “unsustainable” and “unbalanced,” it is probably about time. The question is not whether or not growth must slow, but whether or not it is possible for the government to manage the rebalancing process as it does, and whether a soft, short landing is possible while all the imbalances are unwound.

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