China manufacturing hits 2-year high; seen helping Brazil

Flash manufacturing PMI in China recorded a 2-year high in January, signalling import growth that will boost Latin American economies

Request a PDF

The HSBC flash PMI for China came in at 51.9, above expectations of 51.7 and the highest level since January 2011, with many components increasing at a faster rate.

Output, employment, input prices and the quantity of purchases all increased at a faster rate while stocks of finished goods contracted at a faster rate and new export orders increased, changing direction.

“While the export orders component has improved markedly in recent months from just 44.9 in September last year, the overall picture remains that the recovery in China is primarily driven by domestic demand,” Danske Bank senior analyst Flemming Nielsen said.

He pointed to the purchase of inputs in January, which “improved substantially” to 54.2 from 53.2 in December, as good news to countries that rely on exports to China for growth.

“Purchase of inputs is one of the best indicators for China’s import growth and hence we currently have a strong signal that China’s import growth is poised to pick up in the coming months,” said Nielsen.

Wei Yao, a China analyst at Societe Generale, noted that this was the third reading above 50 in a row for the flash PMI, “indicating that the manufacturing recovery is well in progress.”

Commodity exporters in Latin America, and especially Brazil, are likely to benefit from China’s revival in the short term.

‘A STORY OF TWO HALVES’

“Clearly the recovery in China has been a big boost not only to Asia but also to Latin America,” Neil Shearing, chief emerging markets economist at Capital Economics, told Emerging Markets.

 More from Emergingmarkets.org
 Confidence in global economy improves: survey
 Capital flows to emerging market stocks to rise
 Protectionism worries in the BRICs resurface
“It looks like emerging economies in Latin America should start to see an improvement in export performance too as a result of a pick-up in China. Peru, Brazil, places like that.”

“A second factor is that, because China’s economy has picked up, commodity prices have picked up too,” Shearing said.

Capital Economics has its own in-house gross domestic product trackers for Latin America and they show a “marked turnaround in growth performance towards the end of last year and start of this,” he said.

“It’s clear that economic performance in Latin America has picked up and one of the reasons for that is the improvement in the Chinese economy.”

But over the longer term, the Chinese recovery will fade, possibly taking the commodity exporters’ good fortune with it. Capital Economics predicts that China’s growth will slow down in the second half of the year – an opinion shared by other analysts.

Shearing said that growth in China was still supported by big, government-financed infrastructure projects, while other analysts have pointed to inflation dangers that could slow down the economy in the second half.

“It’s a story of two halves – if the Chinese recovery fades, the pick-up in these economies [Brazil, Chile, Peru] will also fade,” he said.

“I think it’s difficult to envisage that Latin America could continue to grow at 5% a year if China slows. Growth in the next couple of years will be around 3%, something like that, maybe a bit weaker.”