China Likely To Ease More
News last Thursday that China’s economy slowed for the seventh consecutive month came from the HSBC Markit Purchasing Managers Index Report. The flash reading for May was 48.7 compared to the 49.3 final reading from April. The reading below 50 signals a slowing economy, with 50 pegged as a benchmark for growth.
The data in the preliminary, or flash, report for May was a continuation of discouraging news from April, where most of the sectors, including imports, exports, and even retail or consumer spending were sluggish. The Chinese government’s official figures for April, however, showed a PMI of 53.3, which was the highest figure in slightly more than a year. One major difference between the HSBC Markit survey and the Chinese National Bureau of Statistics measure, the official government PMI, is that the government data represents data including the large state-owned firms. The state-owned firms have better access to credit than the small and medium enterprises, which are also obviously smaller in scale.
China’s Premier Wen Jiabao
Premier Wen Jiabao indicated the day before the flash PMI data came out that China will again ratchet up its support of the economy. First quarter GDP growth slipped 8.1 for China. With second quarter growth projected to be at 7.9 percent and growth projected at 8.2 percent for the full year 2012, Wen has been urging more support for the economy. China’s central bank, the People’s Bank of China, has already provided three reserve ratio requirement cuts, or RRR cuts, for the capital reserves the large banks hold. This has freed up capital for lending. Now the next target mentioned by Wen is for infrastructure spending. The government will move up several projects, including energy projects, railways, rural infrastructure, as well as overall infrastructure construction. Additionally, Wen mentioned healthcare and education projects as well. Spending on road and bridge construction particularly had been lagging.
Many analysts point to the successful dampening of inflation, which China had been fighting via benchmark interest rate increases until the middle of last year. Overall GDP growth was slowed as well as overall inflation, though the overheated property sector which had been in the throes of rampant speculative activity, has taken longer to cool off. Wen stated that the tightening in the property sector will continue. Until the fall of 2011, the main worry by Beijing still centered around inflation, and even as tightening ended, many in the PRC government appeared reluctant to loosen things too much. Benchmark interest rates, for example, haven’t been touched since they were raised to 6.5 percent last year, and are still expected to be left alone.
China’s Official Government PMI
Although China’s policy makers appear ready to do more, Beijing has mostly adhered to Wen’s stated policy of fine-tuning the economy rather than any massive stimulus or over-arching policy shift, such as the massive stimulus of more than $600 billion Beijing undertook in response to the financial crisis of 2008-2009. The targeted fiscal approach, tightening on the property sector to cool that off, along with aiming for government speedup and spending on infrastructure shows the still moderate, gradualist view of Wen’s and the leaders in Beijing that is likely to continue. While Beijing would like to see money supply grow, for example, there has been the reluctance to lower benchmark interest rates or even the RRR all at once. Mild assistance with regard to food and fuel for consumers, two important areas that directly impact consumers’ budgets, has been, again, moderate. As the health of the SOEs as far as credit availability and business is outpacing the smaller, private businesses, Beijing also needs to loosen credit for the SME sector, an important part of China’s overall economy.
Will Beijing Move Faster?
Many analysts say Beijing needs to do more and do it faster. The increasingly uglier picture of Europe, China’s significant trading partner, is one factor outside China’s borders. The other factor is a domestic one, that the Chinese consumer is being counted on to pick up some of the slack created by the falling export trade. So far, this has been a bit disappointing. But Beijing has a lot of measures in reserve, and while it may do so more aggressively and faster, its support and stimulus looks as though it will continue largely along the same lines it’s been pursuing. Call the policy “Wen’s way,” and China looks committed to sticking with this as it works.
Committed to your Global Profits,
Chief Investment Analyst
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Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.
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