Econintersect: The official Purchasing Managers’ Index for July has been released by the National Bureau of Statistics. The index declined even 
closer to the 50 line that is the demarcation between expansion and contraction for manufacturing in China with a reading of 50.1, down from 50.2 in June. According to Simon Rabinovitch in the Financial Times, analysts had been expecting an improvement in the number in response to the government’s actions to stimulate growth, which included interest rate cuts and urging banks to increase lending. However, the Financial Times indicates that Chinese officials have reiterated their intention to continue to cool the country’s real estate sector which many have feared could enter a bubble and some say already has. It may be difficult to discourage further real estate expansion while trying to strengthen other sectors of the economy, such as manufacturing.
The concern of the government is demonstrated by the following from the Financial Times:
Wen Jiabao, the premier, warned on Tuesday that people should not underestimate the risks that the Chinese economy is facing, with growth slowing at home and the world economy in bad shape.
“Downward pressure is still relatively big,” Mr Wen said.
There are two PMIs reported for China. Last week the Flash PMI reported by Hong Kong Shanghai Bank (NYSE:HBC) had a reading below 50 for the ninth consecutive month. But the preliminary reading rose to 49.5 (GEI News, one week ago) and that had given hope that the official PMI would show an improvement from the June reading. However, not only has the official PMI declined again, but the final reading from HSBC come in below the preliminary number, now reading 49.3.
The difference between the two PMI has been discussed previously by GEI News. From an article 02 May 2012:
The HSBC PMI focuses more on smaller and private companies, while the official PMI surveys many large and state-owned companies. The Dow Jones Newswires article indicates that the difference between the two gauges may be because smaller companies, which have a harder time accessing credit, are recovering slower than large ones, economists have said.
Rather than Flash PMI moving into expansion territory above 50 to more closely agree with the official PMI, it now appears that the two may be converging at or below the 50 mark. See the following graph from Zero Hedge:
Click on graph for larger image.
Even though ten of the eleven components in the official PMI were contracting (only output for the past month expanded), some of the contracting areas are forward looking but others may actually be showing potential for a turnaround. Stocks of finished goods were lower and new orders were relatively strong at 49.0. The biggest contraction was in input prices with a 41.0 reading, reflecting the deflationary pressures that GEI News has been reporting.
Finally a cautionary word from an article in the Wall Street Journal indicates the low PMI reading may have been affected by seasonal factors.
Sources:
Chinese manufacturing growth slows (Simon Rabinovitch, Financial Times, 01 August 2012)
China PMI Improves, but Still in Contraction (GEI News, 24 July 2012)
China: HSBC PMI Still Indicating Contraction (GEI News, 02 May 2012)
China PMI Misses and Prints Lowest In 8 Months With 10 of 11 Sub-Indices Contracting (Zero Hedge, 01 August 2012)
China: Prices Falling Off a Cliff, Trade Balance Unexpectedly Positive (GEI News, 10 July 2012)
- UPDATE: China Posts Lower Official PMI in July, Possibly Due to Seasonal Factors (The Wall Street Journal, 31 July 2012)
