China: August Manufacturing Slump

Econintersect:  The Flash HSBC Manufacturing PMI (Purchasing Managers’ Index) dropped sharply form the June reading and well below expectations.  The reading of 50.3 is a number just above the 50 value which is considered the dividing line between expansion and contraction.  The HSBC for June was 51.7 and Reuters reports the expectation for August had been 51.5.  The August reading was the third month in a row that the index reported a number reflecting expansion.  The combination of a slower advance for manufacturing and a downturn in China’s real estate markets is a combination that could cause the government some concern with respect to maintaining their target GDP growth rate of 7.5% for 2014.

The data was weaker in all areas of the survey:

The Flash report is for preliminary data from the small and mid-sized companies that HSBC surveys.  These are mostly privately owned and are quite sensitive to China’s volume of exports.  The final report, which rarely deviates significantly from the Flash report is due to be released 01 September.  The official PMI survey run by the government is due out at approximately the same time.  The government report covers mostly large and government owned enterprises and tends to be less volatile than the HSBC survey results.

Hongbin Qu, Chief Economist China and Co-head of Asian Economic Research at HSBC commented on the latest report, calling for “more policy support“:

“The HSBC Flash China Manufacturing PMI moderated to 50.3 in August, down from 51.7 in July. Both domestic and external new orders rose at slower rates compared to the previous month. Meanwhile, disinflationary pressure returned as input and output prices contracted over the month. Today’s data suggest that the economic recovery is still continuing but its momentum has slowed again. Therefore, industrial demand and investment activity growth will likely stay on a relatively subdued path. We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity.”

The surprise PMI decline does not correlate with July exports which were reported last week to be sharply higher.  There is a question of accounting synchronization not being perfect and the export surge might not have been yet reflected in the manufacturing sector; or the exports attributed to July may have occurred in the month or two before they ended up “on the books”.  There is a third possibility regarding the unusually high exports reported.  In the past couple of years it has been discovered that some exporters reported bogus numbers in order to hide transfers of money into China.  That must always be considered a possibility when the numbers don’t balance.

John Lounsbury

Sources:

• Output and new orders both expand at weaker rates in August (Press Release, Markit, 21 August 2014)

• China economy fears deepen as August HSBC flash PMI at three-month low (Xiaoyi Shao and Gui Qing Koh, Reuters, 21 August 2014)

• China Exports Accelerate, Imports Fall in July (Liyan Qi, Mark Magnier and Richard Silk, The Wall Street Journal, 08 August 2014)

• China Continues Stable Inflation, Deflation (GEI News, 09 August 2014)