The good news continues out of China. In the aftermath of the promising numbers from the recent HSBC Flash PMI numbers for November, the official government numbers have followed suit. The official manufacturing PMI was up to 50.6 from 50.2 in October, with the strong positive reading more confirmation that the economy is beginning to rebound. The slowdown in China’s economy has been showing signs of ending in the last couple of months, with each month’s data providing more evidence of a turnaround.
China PMI Source: clearmoney.com
The official government survey tends to deliver stronger data than the HSBC Markit survey, as the government survey takes stock of the larger, state owned enterprises, or SOEs, compared to the HSBC survey of smaller, private businesses. The smaller firms have been harder hit in the economic slowdown as many of them are in the export trade, which has felt the impact of global weakness. The latest government survey shows activity is picking up in manufacturing, retail, as well as most other areas of the economy. The indications are now pointing to a widespread recovery.
While the tone of most analysis surrounding China’s economy has changed in the last three months, there are still cautions. Although the readings above 50 indicate growth, the upturn since September was seen by some analysts as still fragile, as only a few areas of the economy were turning positive then. The concerns were that the downward cycle wasn’t completely broken yet and that given the persistent weakness of the global economy, any rebound could still be vulnerable to setbacks. Part of that worry still exists, as some weakness in the US as well as the uncertainty with its fiscal cliff along with the ongoing malaise of the eurozone loom. Europe particularly, as China’s largest export partner, remains a problem. Indeed, the eurozone debt crisis and the European Union members’ response to it, with severe economic cutbacks, eventually was the catalyst that kicked off the slowdown in China in the first place.
China’s annual GDP growth rate slipped to 7.4 in the third quarter of this year, reflecting the effects of the protracted slowdown. The government maintained a target rate of 7.5 percent, which during the heart of the slowdown earlier in the year, some analysts thought it wouldn’t be able to reach. Recent statements by commerce minister Chen Deming, however, reiterated that the economy was on track to meet or exceed this, as even with the slowdown, the first three quarters averaged averaged 7.7 percent growth year over year. Although growth had slowed for seven straight quarters, with the indicators that growth is now picking up again, most analysts see next year’s GDP growth between 7.5 percent and 8 percent.
Beyond Current Remedies
The careful policy measures that Beijing undertook beginning with bank reserve ratio cuts back in late 2011, through the benchmark interest rate cuts last year, followed by the infrastructure stimulus in the fall, along with some other monetary and credit measures along the way, were part of the fine tuning approach policymakers followed in easing the economic slowdown. But China’s leaders, both old and the new group ushered in just last month, know that the larger structural issues still remain. Exports still accounted for slightly more than 30 percent of GDP last year, and the trouble in Europe graphically brought home the risk of being dependent not only on a large aggregate external partner for a major part of its economy, but how easily that trouble can be passed along. Although nothing is new in terms of Beijing’s knowledge of this possibility, the eurozone swoon has to have put policymakers in mind to accelerate the reform work on the country’s economic architecture. Recent reports by the IMF and Moody’s simply underscore the obvious.
Stocks And The Data
Investors are slowly returning to Chinese equities, although that has been picking up speed in some quarters. While the US ADRs and non-domestic China ETFs have enjoyed more popularity than the local Shanghai traded shares, investors are beginning to look seriously at Chinese stocks due to the combination of attractive valuations and the positive economic stirrings. The ADRs were battered due to a number of reasons, not all connected to legitimate fundamentals about the businesses, that’s certain, but as some of those peripheral issues died down, it has at least given investors a chance to look at China stocks more clearly, with opportunity in sight.