China's HSBC flash PMI fell to a nine-month low at 47.8 from July’s 49.3, well below the expansion territory of above 50 percent and the second-lowest reading since March 2009, data showed on Thursday.
New export sales fell at the sharpest rate since March 2009, while stocks of finished goods registered a record increase as the slowdown in the global economy continues to impact the world’s biggest manufacturer.
The new orders number has been below 50 “for some time now,” showing that companies have been producing but demand is low, Alex Hamilton, economist at Markit, which compiles the PMI survey for HSBC, told Emerging Markets.
Last month, new orders fell while output still increased and maybe this is only now feeding through, causing this month’s record increase in stocks to near 54 from its usual level of around 50, he explained.
“That index has remained relatively stable throughout history, this big jump is the first we’ve really seen, we can’t really make too many predictions on what will happen next month,” Hamilton said.
He noted that there was an element of spare capacity as well in August, with backlogs of work down for only the fifth time in the past 41 months. This, combined with a fall in overall new business, meant that manufacturers reduced their staff numbers.
The manufacturing employment index was unchanged from July’s 40-month low, while the output index fell to a five-month low of 47.9 from July’s 50.9.
EXTERNAL WEAKNESS
“This flash report is plainly awful,” Wei Yao, Societe Generale’s China economist, wrote in a market note. “Clearly, the push from the government still pales in comparison to the combined force of the intensified external weakness and the shockwaves from the housing sector correction. “
After the 2007 financial crisis and the 2008 collapse of Lehman Brothers, China embarked on a massive program to stimulate building and infrastructure to make up for decreasing demand for its exports and some analysts believe this partly explains the rise in inventories, especially in the housing market.
“After the financial crisis the authorities had a mass infrastructure spending drive to build cities that now house no people,” Hamilton said. “If you do that - artificially support economic growth - then you’re going to get payback in the years to come. There’s a demand and supply issue there. “
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“It’s more of an artificial support of growth due to the fact that there’s very little demand, so it’s all supply side. All these houses, all this infrastructure, are not being used and that’s not efficient and that’s kind of going back to bite them a little bit,” he added.
Yao pointed out that both the input and output price index “pointed to continued deflation,” as they fell to 39.9 and 40.6.
China’s high level of excess capacity is a structural issue for many sectors and “will put downward pressure on producer prices and corporate profit margins for years to come,” she said.
The People’s Bank of China (PBOC), worried about an uptick in housing prices and about what seems to be a bottoming out of inflation, has so far refrained from aggressive monetary policy easing, preferring to use reverse repos to inject liquidity in the money markets.
STIMULUS IN THE PIPELINE?
This week, the PBOC has conducted reverse repos worth 365 billion yuan ($57.5 billion), or the equivalent of a cut of 34 to 40 basis points in reserve requirement ratios (RRR), but liquidity conditions have remained tight, according to Yao.
“We think policymakers could no longer sit on the sideline. If activity data reconfirms the weakening trend, interest rate cuts will be back on the table regardless of short-term food inflation outlook, ” she wrote, adding: “there is now every reason to cut RRR.”
The flash PMI figures show that Chinese producers are struggling with the strong global headwinds, Hongbin Qu, chief economist for China at HSBC, also said.
“To achieve the state goal of stabilizing growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months,” Qu said in a statement accompanying the release of the data.
The weakness in China’s export orders “is consistent with the evidence of a global demand slowdown in July’s trade data,” analysts from Capital Economics wrote in a market note, adding that July export figures for South Korea, Taiwan and Japan “were all terrible too.”
“It makes sense, we think, for policymakers to err on the side of caution and step up their stimulus efforts. Any measures introduced now will take time to have an effect,” the Capital Economics analysts added.
The authorities will probably be more selective this time when deciding what areas to stimulate and how, and the amounts will likely be smaller, Hamilton said.
“I don’t see a massive response fiscally or monetary-wise unless conditions really do start to deteriorate rapidly, especially in the context that it’s a year of political change in China, so ... if the authorities can keep policy quiet, under radar and stable that’s what they are going to do,” he said.
“It’s going to be more of a kind of a tinkering process and a gradual slowdown and how best to manage that are going to be the policy steps I think they are going to take over the next half year.”