China Jan PMIs Tell Different Stories

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Source of picture: Imaginechina/Rex Feature

 

By John Richardson

ONE can interpret last week’s release of January purchasing manager’s indices for January just about any way you like.

Thus, Reuters wrote on 2 February: “China’s official PMI released by the government’s statistics bureau showed factories grew slower-than-expected in January, with a reading of 50.4, easing from December’s 50.6 and below forecasts for a nine-month high of 50.9.

“The official PMI has been above the 50-point level demarcating growth or contraction from the previous month since August 2012, though its failure to break above 51 indicates that the economic expansion it signals is only moderate.

“A private sector PMI released by HSBC, on the other hand, rose to a two-year high of 52.3 {This was the HSBC final PMI for January following the release of a preliminary reading a couple of weeks ago}.”

“Trade prospects in China, the world’s biggest exporter, appeared darker than those elsewhere,” continued Reuters.

“The twin Chinese PMIs showed export orders either grew marginally or shrank in January as shoppers in the United States and Europe, the two biggest buyers of Chinese goods, cut back spending.”

Contrast this with Bloomberg, which said on 3 February: “China’s services industries grew at the fastest pace since August as gains in retailing and construction aid government efforts to drive a recovery in the world’s second-biggest economy.

“The non-manufacturing PMI rose to 56.2 in January from 56.1 in December, the Beijing-based National Bureau of Statistics and China Federation of Logistics & Purchasing said in a statement yesterday {this is the official government PMI).

“The Shanghai Composite Index last week posted the biggest weekly gain since October 2011 on optimism that Communist Party leader Xi Jinping can sustain the nation’s expansion and control the risk that inflation will accelerate in the second half.

“Strength in services may assist a shift to a consumption-driven economy as the government targets more sustainable growth and factory output contributes to record pollution.”

Regular readers of the blog will hardly be surprised to discover that this latter news article has led us to be a little sceptical.

The official PMI tends to focus more on big state-owned enterprises rather than private companies as opposed to the HSBC alternative, which looks more at private-sector companies.

Thus, to what extent does the apparent growth in services genuinely represent economic rebalancing compared with more gains by monopolistic, inefficient state-owned giants?

And, as Sydney University’s Dr John Lee points out, China’s retail statistics lump unsold goods in warehouses together with sales to the final consumers.

Further, the growth in construction, highlighted by Bloomberg, has largely been driven by the economic stimulus package in May-October of last year, which was designed to shore up popular support ahead of the leadership handover.

The package has poured more money into inefficient construction projects and has re-inflated the property sector, according to another Reuters article, published on 20 January.

“China’s average annual urban disposable income in 2012 was 24,565 yuan. Home prices meanwhile averaged 20,700 yuan per square metre in Beijing last year,” said the article, which indicates that China’s recovery has made the already difficult job of economic rebalancing a lot harder.

In addition, although December’s retail sales rose by 15.2%, which was an eight-month high, UBS argues that the strong figure was largely the result of an increase in property transactions and spending on furniture and household goods {never mind the distorting effect of unsold goods in warehouses}.

HSBC adds that investment growth is making the biggest contribution to growth since 2009 – the year that China injected $640bn into the economy to compensate for the global financial crisis.

The 2 February Reuters article also says: “Price pressures were shown to be building in China, with both surveys indicating input prices at their highest since mid-2011.”

We still think this “recovery” might have some more legs as money from last year’s stimulus package continues to slosh around the economy.

But inflationary pressures, as Reuters and others have argued, are building. This suggests higher interest rates and the withdrawal of stimulus in H2.

Plus, Beijing continues to give every indication of a strong commitment to economically disruptive restructuring efforts, now that its new leaders are in place.

For instance, it is setting a target of growth in industrial production at just 10% for 2013, compared with an actual increase of 13.9% in 2011.

Even this 10% target would be difficult to achieve because of weak external demand and constraints on domestic demand growth, a government official told the China Daily on 24 January.

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