It’s Not 2008 In China
Prior to the release of China’s latest official PMI report, Beijing took some time to quell expectations of dramatic stimulus action. Vice Premier Li Kiqiang, according to a Reuters report, reiterated that China will concentrate on structural reform of its economy along with continuing to promote internal, or domestic, demand. This will continue in the face of what the vice premier said was downward pressures increasing on China’s economy, something which Premier Wen Jiabao pointed out recently as well.
These announcements appear to be more than mere bromides or political statements designed to quell expectations of potentially dramatic and massive stimulus moves by the PRC leaders, something that many China observers, both bear and bull alike, have either been calling for or assuming. Yet even if we factor out the perpetual China bears and critics who have used every slight downtick in the Shanghai Composite over the several years to predict the end of the Chinese economy, there are legitimate arguments for more, faster easing.
China Official PMI
Source: Yahoo.com
Slowing Still
The official PMI on Friday from the National Bureau of Statistics, the official voice of China’s data, gave a reading of 50.4 for May, which was down from April’s high and was the lowest reading in six months. The official China Purchasing Managers Index reading is weighted heavily toward the state owned enterprises (SOEs), as opposed to the HSBC survey, which is lower as it includes the smaller, private firms (small and medium enterprises). But the message is clear: manufacturing and confidence in the sector by those who are on the ground continues to fall. The employment picture is sluggish in the sector, according to the HSBC data on the employment sub-index, which registered a relatively weak 48 for May.
While the ongoing economic nightmare happening in Europe is the culprit as far as exports go, those calling for further stimulus point out that domestic demand is not as robust as it needs to be, especially to pick up the slack from the deteriorated export picture. While things are nowhere near dire right now, what legitimately concerns those calling for more vigorous easing, is if the slowdown were to pick up more steam. With GDP projections in some quarters for Q2 being dropped to around 7.5 percent from earlier 8 percent growth expected, the concern is if the projections continue to shrink for the third and fourth quarters.
Policy Advisors’ Response
The government economic leaders in Beijing have been sticking to the stated course, which has been Premier Wen Jiabao’s gradualist approach, as we’ve written about before. Policy makers are certainly well aware of the lessons of 2008 and 2009, when Beijing decided on a massive stimulus of $635 billion which they pumped into their economy to stave off the effects of the global financial crisis. This 4 trillion yuan injection was unleashed to battle the effects of the worldwide economic and financial weakness, which despite some of the hardships reaching China, was largely successful. The current global economic weakness has not deteriorated to anything like the 2008 and 2009 days, and is unlikely to do so.
Measures Taken
China has already been taking measures to combat the slowing, with its lowering of the banks’ reserve ratios three times, as well as attempts at beginning to make more capital available where it’s much needed, in the small and medium enterprises (SMEs). Recently, the commitment of 1 trillion yuan for infrastructure projects has been put into play. But more than that, Vice Premier Li Keqiang, according to Reuters, was quoted in a Chinese state radio address as saying, “We must stick to the long-term strategy of stimulating domestic demand in order to maintain stable and relatively fast economic growth. It is also an important step to reform our economic structure.”
Subway Project in Xian, Shaanxi Province
Source: Reuters.com
A Different Path
While many who had hoped for a massive 2008-style injection of raw cash into the system are bound to be disappointed, investors among them, as the Shanghai Composite dipped slightly on the news of major stimulus being unlikely, in the long run it may be good news. If the policy advisors in Beijing have it right, then China’s economy is still stronger than its critics suggest, as the leaders, following Wen’s and Li’s lead, are assessing that things will right themselves with the current and future gradualist measures. All is far from dire, and there shouldn’t be a hard landing. Indeed, there are still pockets of relative strength near term for the Chinese economy, and we haven’t heard the last of the consumer yet. Chinese consumer demand, which has paused, shouldn’t be counted out even in the near and medium term.
Committed to your Global Profits,
Jim Trippon
Chief Investment Analyst
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