A slowing Chinese economy may suggest that economic policy in China is falling short
It was notable that when questioned earlier this year, as to what threats the global economy faces in 2014, the legendary FX trader/investor George Soros claimed that the real exponential threat to the global economy was China’s potentially slowing economy.
Now given that many of the global central banks appear to have a handle on keeping their economies simmering and under control, by adjusting the economic temperature through interest rate policy and monetary easing policy, analysts expect that it would have to be an outlier series of events to cause a systematic shock to ripple through the globe’s economy.
China, with its ‘unknowns’, could provide that outlier shock. Therefore when any data published doesn’t match up to analysts’ expectations, such as the latest HSBC/Markit Economics Chinese flash manufacturing PMI, the tendency is for market commentators to question the Chinese government’s overall economic policy.
Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co- Head of Asian Economic Research at HSBC said:
The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing sectors, which has already weighed on employment growth. As inflation is not a concern, the policy focus should tilt towards supporting growth to avoid repeating growth deceleration seen in 1H 2013.
The Markit PMI wasn’t the only poor data print relating to China, as overnight the Conference Board’s LEI for China, (leading economic indicator) decelerated sharply in December and the notes accompanying the publication suggested that China’s growth has become far too reliant on debt. Now there’s a systemic problem we’ve read of before, “too much unserviceable debt”, just as a banking crisis hit the Western Hemisphere in 2008…
In other news this morning Europe’s private sector PMI came in ahead of expectations hitting the strongest reading since June 2011 at 53.2. New orders across the region increased for the sixth successive month. Germany’s private sector PMI rose to 55.9.
HSBC Flash China Manufacturing PMI
Operating conditions deteriorated for the first time in six months. Flash China Manufacturing PMI was at 49.6 in January (50.5 in December) a six month low. China Manufacturing Output Index was at 51.3 in January (51.4 in December) a three-month low. Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co- Head of Asian Economic Research at HSBC said:
The marginal contraction of January’s headline HSBC Flash China Manufacturing PMI was mainly dragged by cooling domestic demand conditions. This implies softening growth momentum for manufacturing.
Conference Board LEI increased in December
The Conference Board Leading Economic Index (LEI) for China increased 0.4 percent in December. The index stands at 278.8 (2004 = 100), following a 1.3 percent increase in November and a 0.8 percent increase in October. Two of the six components contributed positively to the index in December. Says Andrew Polk, resident economist at The Conference Board China Center in Beijing:
The China LEI decelerated sharply in December, posting its lowest monthly growth rate in nine months. Credit creation alone supported the LEI, a symptom of how credit-reliant growth has become.
Euro-zone PMI hits highest since June 2011
The euro area private sector economy grew for a seventh consecutive month in January, according to the flash Markit Eurozone PMI, with the rate of growth accelerating to the fastest since June 2011. The headline PMI (which tracks output across both manufacturing and services) rose from 52.1 in December to 53.2. Growth picked up in Germany and the rate of decline eased in France, while the rest of the region also saw a strengthening upturn. New orders across the euro area rose for a sixth successive month, albeit growing at a rate unchanged on December.
German Business activity rises at sharpest rate in over two-and-a-half years
Business activity in Germany’s private sector continued to rise at a marked pace at the beginning of 2014, highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index registering 55.9 in January. The latest reading was up from 55.0 in the previous survey period, signalling the quickest pace of expansion in just over two and a half years. The acceleration of output growth largely reflected increased production at manufacturers, with the rate of output growth the sharpest since April 2011.
Market overview at 11:00 am UK time
The MSCI Asia Pacific Index of shares declined 1.2 percent. The Aussie index, the ASX 200, closed down 1.07% due to the fall in China’s PMIs. The CSI closed down 0.53%, the Nikkei down 0.70% and the Hang Seng down 1.51%.
European indices are mainly up due partly to positive PMIs, the STOXX index is up 0.13%, the CAC up 0.20%, DAX down 0.09%, with the UK FTSE down 0.08%.
The DJIA equity index future is down 0.28%, the SPX future is down 0.23% and the NASDAQ up 0.11%. NYMEX WTI oil is up 0.11% at $96.84 per barrel, NYMEX nat gas is up 2.24% at $4.79 per therm. COMEX gold is up 0.46% at $1244.30, with silver up 1.19% at $20.08 per ounce.
Forex focus
The pound was little changed at $1.6593, up 0.11% early in London trading, after climbing 1.4 percent in the past four days. The U.K. currency traded at 83.17 pence per euro after appreciating to 81.68 pence yesterday, the strongest since Jan. 10th, 2013.
Sterling has gained 9.7 percent in the past year, the best performer amongst the 10 developed-nation currencies tracked by Bloomberg’s Correlation-Weighted Indices. The euro rose 6.5 percent and the dollar has gained 4.4 percent. The pound snapped its four-day gain versus the dollar before an industry report in the UK that economists predict will show a gauge of U.K. retail sales dropped in January.
Australia’s dollar slid 0.6 percent to 87.99 U.S. cents mid-afternoon in Sydney after climbing 0.5 percent yesterday. New Zealand’s currency dropped 0.4 percent to 82.80 U.S. cents. Australia’s dollar dropped against its 16 major peers after the private report from HSBC showed that manufacturing unexpectedly contracted in China, the South Pacific nation’s biggest export market. New Zealand’s dollar strengthened 0.2 percent to NZ$1.0628 per Aussie. It reached NZ$1.0543 on Jan. 16th, the highest since December 2005.
The greenback was at $1.3634 up 0.64% per euro from yesterday, after touching $1.3508 on Jan. 20, the strongest since Nov. 25th. It slid 0.2 percent to 104.31 yen, after gaining 0.3 percent in the previous two sessions. Japan’s currency’s strengthened 0.2 percent to 141.33 per euro.
Bonds briefing
The U.S. 10-year treasury debt yield fell two basis points, or 0.02 percentage point, to 2.85 percent early London time. The 2.75 percent note due November 2023 rose 6/32, or $1.88 per $1,000 face amount, to 99 6/32. The yield dropped to 2.82 percent on Jan. 17th, the lowest since Dec. 11th. Treasuries rose for the first day this week after the HSBC PMI survey showed Chinese manufacturing unexpectedly contracted to a six-month low, the poor PMI reading boosted demand for the relative safety of the U.S. securities.
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