By John Richardson
A detailed study of some of China’s positive economic data for November adds a lot more weight to the point we made yesterday: The “recovery” is unlikely to last into 2013.
November marked the first time in over a year that both the official China manufacturing PMI and the final HSBC/Markit Economics PMI were above 50 (see the table below). Anything above 50 marks economic expansion.
(The indices were released earlier this week. HSBC/Markit Economics released a “flash”, or preliminary, PMI for November a few weeks ago.).
A 3 December post from the FT Alphaville blog says, referring to data from the final HSBC/Markit PMI: “While output was strong (up from October’s 48.2 to 51.3 flash), more forward-looking indicators were less encouraging than in October.
“Finished goods inventory edged up from 48.4 to 48.8 (flash 49.5), signalling that inventories are being run down at a slower rate. New orders weakened from 51.2 to 50.8 (flash 50.1).
“So the ‘new orders’ are not as bad as in the flash, and still on the right side of 50 – but they are down quite a bit from October.
“This is not helping the drawing down of inventories, which had built up to problematic levels around the middle of this year, but were beginning to abate in the past few months.
“Input inventories remained in contraction with the latest reading of 47.9 (versus. 47.3 in October), while finished goods inventories were run down at a slower pace (48.8) than in the previous two months (48.1 in October and 47.9 in September).
“Perhaps worse though, is the absence of any sign of improvement in employment manufacturing.”
The table below is from the official PMI shows that the employment situation has worsened. It also indicates a build-up in raw material and finished-goods inventories.
Source of table: FT Alphaville
A further factor could be that the May-September economic stimulus was more of the “same old, same old” – money channeled from official state-owned lenders to the state-owned enterprises (SOEs) and local government infrastructure projects, rather than the private sector.
China’s small and medium-sized enterprises (SMEs), which are responsible for an estimated 60% of economic activity and 75% of employment, dominate the private sector. The bulk of buyers of chemicals and polymers in China are SMEs.
(As tomorrow’s blog post shall detail, the SME’s have become increasingly dependent for their financing on the “shadow banking system”, which could be China’s equivalent to the US sub-prime crisis.)
In order for the recovery to be sustained, China’s new leaders would have to launch another big stimulus package in 2013.
But that would lead to further inventory problems, and might do nothing to lower unemployment if the money continues to mainly flow to the well-connected SOEs. This seems highly likely as the reform process is in its early stages.
Inflation would also become a bigger problem. The consumer price index (CPI) index, even without another big surge in bank lending, is set to once again rise above 4% by mid-2013.
China battled against inflation at above 4% throughout 2011 and during the early part of this year. The rate of food-price inflation is of particular importance for economic activity, and for social stability, as China remains a poor country.
This indicates that monetary policy in 2013 is likely to become neutral or will involve a tightening of credit conditions.
More big stimulus would also set back economic rebalancing while worsening the bad-debt crisis, as the IMF indicated last week.
What is more, the leadership transition is over and so there is less of a need to buy public support.
We therefore think there will be no new big stimulus package in 2013 – barring an economic collapse in the West that causes Beijing to panic.
As a result, growth is likely to slow again as China confronts a very painful and prolonged period of economic adjustment.