International | Jul 08 2013
– Chinese PMIs weaker
– Trend steady nevertheless
– Asia still the growth driver
By Greg Peel
In last month’s round of manufacturing purchasing managers’ index (PMI) data, China’s result fell slightly to 50.1, the US saw a slight rise to 50.9 and the eurozone saw a slight rise to 48.8. These numbers measure not growth itself but the pace of growth, with 50 suggesting a steady pace, numbers above 50 an expanding pace, and numbers below 50 a contracting pace.
Hence it appears Chinese manufacturing is almost dead steady, the US is much the same and the eurozone continues to see contraction, albeit at a milder pace. However, as DBS Group Research points out, this is not quite the case. While a 50 level does imply 0% growth in the US and Europe, the same level for China actually implies 9% industrial production growth. A level of 55 implies around 14%. One cannot make distinct apples to apples comparisons.
PMI measurements have become a lightning rod for global economic sentiment in recent years. The more investors have focused on the monthly data, and on their preceding “flash” estimates, the more volatile have markets become around data releases. It would seem at present, for example, that were Beijing to release a number under 50 for July it would seem as if the sky had fallen in.
But there won’t be a data release in July, because Beijing has temporarily suspended the publication of its official PMIs. As the government struggles with issues of financial reform, the suspension was deemed necessary given an overload of survey data being received, an imbalance of industry responses (the steel industry appears to have gone quiet, for example), and a clamp-down on the practice of over-invoicing for currency speculation purposes, which distorts the data.
Fortunately HSBC publishes its own, independent Chinese PMI data, which has a greater skew towards smaller private companies and away from large state-owned companies. The bad news is that while Beijing’s manufacturing PMI fell in June to 50.1, HSBC’s number is already implying contraction at 48.2. More market volatility may be on the cards when HSBC’s becomes the sole benchmark reading this month.
If we take a step back from typical market panic, DBS notes the Chinese official PMI has been bouncing around the 50.5 level now for 14 months, implying that for over a year Chinese industrial production has been growing at a touch over 9% pretty steadily. This implication is backed up by Beijing’s actual industrial production readings, which have been coming in around the 9% year-on-year growth mark now since mid-2012.
Source: DBS
DBS notes China’s service sector PMI is also drifting lower, but only “drifting”. Beijing’s and HSBC’s numbers for June were 53.9 and 51.3 respectively.
Thus DBS suggests that despite all the nervousness, Asia is where it has been for the past 12-14 months – grinding steadily forward, if not a bit more slowly than generally hoped. Despite sub-2% GDP growth in the US and contraction in Europe, net Asian industrial production (for the “Asia 9”, excluding Japan) has been growing at around 5% (seasonally adjusted) since early 2010, and 10% since January 2012. Exports from Asia have also been growing at a steady 7%, albeit a little slower of late after a surge in the run-up to 2013.
Source: DBS
The above graphs suggest that while the actual numbers may have been bouncing around a bit over the past couple of years, a steady upward trend remains evident. DBS also points out that more nervousness is generated when data suggests Asian, and particularly Chinese, export data show steadily falling exports to Europe and only weak growth in exports to the US, China’s two biggest customers. But to focus on these two regions is to overlook another ongoing trend.
Source: DBS
Net Asia 9 exports are growing at 7% per annum because Asia 9 exports to Asia 9 are growing at 8-9%. “Asia is increasingly the centre of gravity of the global economy,” suggests DBS. Every three and a half years, Asia “adds a Germany” in economic terms. If we consider Asian cross-border exports to represent trade in one regional economic bloc, then Asian “domestic” demand is growing at a rapid clip.
DBS notes the Asia 9 GDP continues to grow around the low 6% mark, as it has done for the past six to seven quarters. It’s not the breathtaking pace we once knew, but when Europe is still shrinking and the US can barely manage 2% it’s a stand-out result nonetheless. The analysts also acknowledge that Beijing is currently enforcing economic reforms, such as the recent short-term credit squeeze, which are “patching the cracks in the foundation before embarking on economic renovation”.
Slow and steady wins the race.
Technical limitations
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