In Seven Reasons that China’s Economy might be slowing down, I had described the factors that might lead the super strong Chinese growth engine to slow down.It seems that the symptoms of a slowdown have started appearing with Purchasing Manufacturing Index (PMI) and Leading Indicators both indicating that growth is slowing.After a scorching 11.9% growth in the first quarter of 2010 ( note that Chinese statistics are not the most trustworthy),the growth was bound to come down as the base effect and the monetary loosening no longer provided the impetus.
China’s Economic Woes
China has been facing problems on both external and internal fronts.It is facing pressure from its International Trade Partners like the US to appreciate its currency which it was forced to do last month in June.Though in my opinion it,the whole episode will be much ado about nothing,however it is putting a slight pressure on Chinese exports.This coupled with the increasing reports of wage pressures in Chinese factories of MNC s is putting a brake on Chinese growth.The European contagion is not helping either combined with the skyrocketing real estate prices which is causing asset misallocation.
Economic Indicators indicate a Slowdown
PMI for June was down sharply missing consensus estimates as well.The Official PMI fell to 52.1 in June from 53.9 in May. The PMI was at its lowest level since since February of this year.Another private PMI from HSBC was down even more sharply to 50.4 from 52.7 in May.What was more concerning was the sharp drop in the new orders and output numbers.Note a number above 50 indicates expansion while below 50 indicates contraction.So while the PMI is above 50,the more alarming thing is the rate of change has become negative.New York based the Conference Board also revised down China Leading Economic Indicator (LEI) down sharply for April after admitting a mistake.This again showed that the Chinese Economy can’t lead the world out of the Global Financial Crisis.
An output index fell to 55.8 from 58.2, the Federation of Logistics and Purchasing said in an e-mailed statement. A measure of new orders slid to 52.1 from 54.8 and an export-order index dropped to 51.7 from 53.8.
The PMI, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.Economic growth is moderating, a rebound in exports is weakening, and slower domestic demand is leading to a build-up of finished-goods inventories, the federation said in a separate statement on its website. Industrial production is entering a “light season” and the output of heavy energy users such as metal and oil processers contracted last month, it said.HSBC’s survey, released with Markit Economics, covers more than 400 manufacturing companies and is weighted more toward smaller, privately owned business than the government’s PMI, according to the bank. The HSBC measure declined to 50.4 from 52.7 in May. Output contracted for the first time in 15 months, according to this survey.
The Conference Board’s leading indicator for China — like the ones it calculates for other countries — is based on publicly available data published by the Chinese government, but the correction didn’t reflect any change in the underlying data. “A human error occurred when reformatting the official data for April. There’s a lot of transformations that need to happen to the Chinese data to make them directly comparable to the indicators we use in other LEIs,” explained Bill Adams, the Conference Board’s resident economist in Beijing.