Beneath the China PMI Hype

moneygame2.jpgBy John Richardson

A LOT of stock market excitement, and perhaps a recovery in petrochemicals prices (more next week when everyone is back in action), has greeted the release of China’s purchasing managers’ indices for December. The official PMI held steady at 50.6%, while the final HSBC PMI came in at 51.5%, the highest reading in 19 months.

(Note, the stock market frenzy was also, of course, stirred up by the US fiscal fudge that, as Nouriel Roubini points out, has solved nothing).

As we discussed last month, the devil is in the detail. A closer look at the official December PMI reveals a mixed picture (see the above chart).

“The data points seem to support our view that it is not a strong upswing. We view these data as signs that the Chinese economy is nearing the end of the early expansion phase in the cycle,” writes Societe General’s Wei Yao in a research note.

“Production eased moderately but remained well above 50. Total new orders were flat at 51.2, while new export orders slipped to 50 in December from 50.2 in November. The two inventory sub-indices – input and output inventory – continued to point to slow restocking.

“However, employment and imports both improved but still remained below the 50 boom-bust line. The biggest increase was recorded in the input price index (our comment – petrochemical prices on the rise?), which recovered to 53.3 from 50.1 in the previous month.

“The data points seem to support our view that it is not a strong upswing. However, we think there is still some upside for the PMI data, albeit less than in the previous cycle, during which this series usually went north of 55 before losing momentum. Policies, especially regarding infrastructure and housing (our italics and emphasis), remain the key.”

The same old same old then: China risks more bad debts from further infrastructure spending and increased social divisions if it re-inflates the property bubble.

But in a persistently weak export environment, the old approach might be seen as short-term political necessity at the expense of rebalancing.

(Please note again: There is a suggestion that China’s official PMI was manipulated downwards by the government in order to conserve some more good news for January, perhaps as a tactic to help China’s new leaders consolidate their popularity)

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