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China's Confusing Economy
FNArena News - April 02 2012

By Greg Peel

With disturbing headlines from Europe having dried up over the past month, world markets have redirected their anxiety towards China and the disturbing pace of its economic slowdown. Fear was heightened when Beijing declared a new GDP growth target of 7.5% for 2012, down from the previous 8.0% standard, a few weeks ago, before markets were startled by China's biggest trade deficit since 1989 being posted in February. Next came a fall in corporate profits for the first time in five years and, finally, last week's drop in the HSBC independent manufacturing PMI measure (initial estimate) has been almost the last straw.

But yesterday Beijing turned around and issued its own manufacturing purchasing managers' index (PMI) for March and the published rise to 53.1 from 51.0 has startled economists who were expecting a slip back to just over the 50 mark. In the meantime, HSBC upgraded its own “flash” result to 48.3 from 48.1 but that's still down from 49.6 in February. As a major manufacturing economy, this PMI is very important to Chinese and thus global GDP. But who's number should we believe?

There are two significant differences between Beijing's officially sanctioned measure and HSBC's independently calculated measure. Firstly, the official measure is weighted towards large state-owned enterprises while HSBC weights more towards small and medium enterprises, and secondly HSBC seasonally adjusts its readings while Beijing doesn't.

More than one broker/researcher has pointed out this morning that China's non-adjusted PMI has risen an average 6% every March since 2005, reflecting life returning to normal after the Chinese New Year interruption and subsequent impact on the January and February PMIs. Hence the impact of seasonality weighs more in favour of HSBC's calculation looking more realistic. It also makes sense that manufacturing should ease while China's biggest export customer – Europe – is slowing.

However, Danske Bank suggests HSBC's seasonal adjustment model may distort the PMI a bit too far the other way.

Barclays Capital had expected such a pick-up in the official PMI in April given the flow-through of monetary policy easing, fiscal spending, and projects beginning in the wake of the recent annual government meeting. The analysts now suggest perhaps what they were anticipating had already begun in March. However, Barclays is tipping further slowing ahead, and is forecasting March quarter GDP growth of 8.2-8.5%. The analysts see a rebound by the December quarter to 8.9%.

Morgan Stanley has nevertheless just raised its 2012 GDP forecast to 9.0% from an earlier 8.4%. That's still down from 9.2% in 2011, but a far cry from Beijing's “target” 7.5%.

Still all a bit confusing really.

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