And now for the weekly tug-of-war between the China bulls and bears – with factions hardening their resolve on a seemingly daily basis. Nail your colours to the mast with these hard numbers:
China’s official PMI index rose to 50.5 in January, up from 50.3 in December, above expectations and the fastest rate of expansion since September. Both output and new order sub-indices grew at a faster pace last month, with the output subindex rising to 53.6 in January, from 53.4 in December and new orders rising to 50.4 following a slight contraction in December, when the new order sub-index stood at 49.8 – to recap, any reading above 50 indicates an expansion of activity, while any reading below 50 indicates a contraction. On a less positive note, the new export order index fell to 46.9 last month, a faster rate of contraction than the 48.6 posted in December, while imports fell to 46.9 from 49.1. Furthermore, there were signs that inflation pressures may not have fully abated; the input price subindex rose to 50.0 last month, following three consecutive monthly readings below 50, during which time China’s consumer and producer inflation growth rates have moderated.
Despite these mildly concerning sub-index readings, the official government message was clear: the slowdown has stabilized and we are on track for a soft landing in 2012, barring a meltdown in the eurozone.
Here’s Zhang Liqin, a researcher with the Development Research Centre of the State Council, as quoted in the official PMI release:
| January PMI continued to pick up slightly from the reading of December, indicating that the economic slowdown trend is gradually stabilizing. The improvement in both new order and stock of purchase sub-indexes reflected the factory production is recovering. But the new export order sub-index dropped last month, showing that the external demand is shrinking and we should pay high attention to the possible hit from external uncertainties. |
So far, so positive. But the picture seems a little less rosy if you look at HSBC’s unofficial PMI numbers. HSBC’s China manufacturing PMI indicated a further contraction in manufacturing activity last month, albeit less of a slowdown than in December. HSBC’s China PMI rose to 48.8 in January, up slightly from December’s 48.7 print, but nevertheless indicating a third consecutive monthly contraction. In contrast to the official PMI index, factory output and new order volumes also fell at a faster rate last month than in December in HSBC’s survey, although, again in contrast to the official numbers, new export orders expanded in January, following a contraction in December, while input costs continued to fall.
Perhaps unsurprisingly given the contrasting numbers, Qu Hongbin, HSBC’s China chief economist and the bank’s co-head of Asian economic research was less positive about the outlook for Chinese manufacturing than the government:
| The final results of January’s PMI survey confirmed the still weak growth momentum of manufacturing activities into the New Year, despite the upside surprise of December IP growth due to the front-loaded production ahead of the early Chinese New Year. This calls for more aggressive easing measures to support growth, given that inflation is no longer a concern. Once filtering through, the policy easing should secure a soft-landing in 2012. But the first quarter is likely to be tough, with GDP growth likely to slow to around 8% y-o-y in 1Q from 8.9% in 4Q11. |
How to explain the discrepancy? And what to make of the numbers? First, a refresher on the differences between the two PMI surveys. The official index, compiled by the government affiliated China Federation of Logistics and Purchasing and issued by the National Bureau of Statistics, predominantly surveys large, state-owned enterprises (SOEs). HSBC’s PMI index, by contrast, is far more heavily weighted towards smaller, private-sector companies, many of which are export-focused. This may partially explain the discrepancy – small, export-oriented manufacturers in eastern provinces have been harder hit by the downturn in global demand and rising labour and input costs than large SOEs that have the cushion of long-term government contracts. With the exception of October, HSBC’s PMI index has consistently tracked below the official index over the past 12 months, as the chart below shows:
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But are the results that conflicting? As the chart shows, although one PMI showed an expansion in activity and the other, a contraction, the overall trend of both indices is broadly similar – and has been over the past 12 months. And it is as a broad indicator of an overall trend that one should arguably look to a PMI for; the relatively small sample size of both surveys – the HSBC survey covers 400 companies, while the CFLP survey covers 820 firms – means that an individual months’ data can easily be skewed. And, in fact, behind the headlines, both surveys point to a similar outcome – a slowdown in Q1 resulting in a soft landing for the economy. One final caveat – the fact that Chinese New Year fell during the latter half of last month also casts doubt on the significance of the January PMI numbers. While the official holiday began on January 23, with all employees across the country given a week off, many companies would have begun winding down operations a week or more in advance of the start of the new year, in order to enable employees to return to their home towns for the new year holiday, which, for many migrant workers in particular, is the only time of year that they return home. It is not uncommon for factories to close for at least two weeks over the new year period, or to run minimal production lines during the weeks surrounding the holiday. Any surveys of January manufacturing data are therefore really only surveying a couple of weeks of regular production and thus their significance is likely to be limited, despite the best efforts of statisticians at the CFLP and at HSBC to seasonally adjust their numbers.
But given the nature of the modern news flow, traders’ need to trade off data and events and the sharp divergence of views regarding China’s macro outlook, any data point such as today’s PMI numbers will be pored over and used to draw multiple conclusions. And the nature of those conclusions is likely to be based as much on whether the protagonist is sitting in the China bull camp or the bear as on the actual data themselves.
Nevertheless, for what it's worth, here are some of the multiple conclusions drawn by analysts regarding today’s PMI releases:
Jian Chang, Yiping Huang and Lingxiu Yang, Barclays Capital:
| Despite weakness in the export orders and imports sub-indexes (Figure 1), overall, we think the NBS PMI report reflected strength in domestic demand and provides comfort about the extent of the expected growth moderation in Q1. In our view, the upside surprise also suggests the stronger-than-expected momentum seen in the December data is not temporary or driven solely by seasonal factors (ie, earlier CNY holidays), but reflects the impact of earlier selective monetary easing and proactive fiscal policy and, hence, could be sustained. We see a small upside risk to our 8.1% full-year GDP growth forecast. |
Zhiwei Zhang and Wendy Chen, Nomura:
| The export outlook appears to be under increasing strain, as the new export orders component fell sharply to 46.9 from 49.8 in December. Moreover, the overstock order component fell to 43.2 from 46.6 and the import component to 46.9 from 49.1, both now at their lowest levels since early 2009, when the economy was seriously affected by the global financial crisis. The employment component fell sharply to 47.1 from 48.7, the lowest in 35 months. Besides the impact from the new year, we believe the employment component reading may also reflect the strain facing the labour-intensive export sectors. New orders less finished goods inventories jumped, which bodes well for the February PMI. However, we cannot rule out the possibility of payback in February after an unusually strong January. |
Wei Yao, SocGen:
| New export orders declined by more than 1ppt to 46.9, reflecting both weak demand and the impact of the festival break. The import sub-index dropped even further, from 49.1 to 46.9, and there was very little seasonality in this series. Together with a depressed level of backlog orders, at only 43.2, the boost in total orders looks temporary, and suggests that manufacturers are not very optimistic about the near-term outlook. Given today’s report, we think year on year export and import growth will prove to be barely positive in January. These figures are due on 10 February. |