Econintersect: The preliminary China PMI for June from HSBC (“Flash” PMI_ has come in at 48.3, well below the expected 49.1. The final reading for May was 49.2. The May and June readings below 50, the dividing line between expansion and contraction, are the first showing manufacturing contracting since October 2012. This news comes as the People’s Bank of China (PBOC) has tightened down on liquidity raising concerns that economic growth may be depressed because of monetary policy. See GEI News article a few hours ago.
The weaker than expected PMI may give pause to the central bank about the timing of its attempt to reign in rapidly expanding credit. Observers will be watching to see what action the PBOC takes in the next few days. From Bloomberg:
Manufacturing weakness, along with the money-market cash crunch, will further test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first four months of the year failed to stoke growth, China’s State Council, led by Li, said last night that the financial system needs to do a better job of supporting the economy.
“If market rates remain at such high levels, the only scenario for the Chinese economy is a hard landing,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing. “That possibility is growing now — it seems the leadership is deliberately taking a wait-and-see stance to see how low China growth can be.”
Bloomberg reported that the seven-day repurchase rate had surged to 12% this morning (20 June 2013), the highest rate since before the Great Financial Crisis. This is much higher than the short-term interbank rates of 7-8% reported by GEI News yesterday. In other policy action yesterday, the China State Council indicated it would add credit support for strategic industries. Just which industries these might be were not specified.
The final HSBC PMI and the official government PMI will be released on July 1. If there are no monetary policy adjustments before then, and the later numbers are similarly disappointing, there may be a demonstration of just how close China is getting to a real financial crisis.
- China Manufacturing Contraction Deepens Amid Cash Pinch: Economy (Bloomberg News, 19 June 2013)
- China Credit Crunch (GEI News, 19 June 2013)