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With the latest official data just released, China continues to show slower economic growth. The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, which was its weakest reading in more than half a year. The index measures manufacturing data, with a reading above 50 indicating expansion, while a reading below 50 indicates contraction. The official data released from Beijing, which was compiled by the China Federation of Logistics and Purchasing, and released through the National Bureau of Statistics, merely confirmed what the earlier flash PMI released by HSBC indicated recently: China’s economy continues to cool down, though the slowing actually was less in June than analysts projected.

Projections by analysts called for a median of 49.9 on the PMI reading, according to a Bloomberg News survey, but nobody’s really quibbling about the results or the cause. The slowdown in Europe has been an ongoing matter that has touched every part of the global economy, so why not China? With the emphasis on China’s export business to Europe so prevalent in its economy, there is some wonder that China’s economy is actually doing as well as it is.

More Interest Rate Cuts?

The HSBC Markit Economics survey for PMI also showed an eighth consecutive month of a drop in manufacturing, with its final figures expected to confirm its earlier flash report. It’s important to note, however, that the Markit survey uses the measure of 420 smaller firms, while the government data surveys larger enterprises which have been doing better. Either way, though, the message from the data is clear: China’s policy easing likely to be ramped up.

The surprisingly slight drop off for June activity and sentiment compared to May doesn’t change most analysts’ views that more monetary stimulus is in the offing. The three bank reserve ratio requirement (RRR) cuts since last November and the recent benchmark interest rate cut could be followed by more of the same. Shen Jianguang, Chief Economist for Mizuho Securities Asia Ltd., was quoted by Bloomberg as saying, “Further monetary easing is warranted.” Shen sees the increased likelihood of additional reserve ratio cuts as well as perhaps two more benchmark interest rate cuts in the second half of the year.

Finding The Path To Growth

Zheng Liqun, a Chinese government researcher, said in a statement released along with the PMI data and quoted by Reuters, that an industrial recovery “would take time.” With European Union countries averaging an 11.1 percent unemployment rate, and the necessity for Spanish banks to be propped up, European austerity certainly put the crimp on Chinese exports. The sub-index for new export orders in China fell to 47.5, a nearly 3 point drop, while the new manufacturing orders, data which includes orders within China, also fell, but only to 49.2.

While China’s GDP growth fell to 8.1 percent for the first quarter, analyst estimates range from 7.2 percent to 7.8 percent for growth in the second and third quarters, with 7.5 percent being the rough consensus. Yet analysts polled by Reuters also peg full year GDP growth for 2012 still to come in at 8.2 percent. This indicates, as some Chinese officials and observers maintain, that third and fourth quarter growth will actually pick up. Whether this proves to be overly optimistic or not will be assessed in time, but the context for the current GDP growth rate is that it will be considered the “worst” in 13 years, according to Reuters. Again, not to belabor this, but 8 plus percent GDP growth in the world’s second largest economy, if that’s the worst case economic growth scenario in more than a decade, perhaps the time is for a bit of a longer term perspective.

Where Will Growth Come From?

Hua Zhongwei, economist at Huachuang Securities, also quoted in the same Reuters piece, offers some perspective. Hua sees growth dipping below 8 percent for Q2, but with a vigorous rebound to more than 8 percent by Q3. The reason? Rate cuts will stimulate growth, and even though there is always a time lag before monetary stimulus takes effect, Hua believes it will spark the economy soon enough. We might add that although policy makers have been slow to loosen the purse strings on credit for the smaller, private businesses, it’s still a matter that growth will be heavily influenced by a pickup of internal demand and consumer activity. At some point, although Europe is not going to go away, of course, Chinese domestic demand due to monetary easing which should attract consumers, will kick into a higher gear.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst