Will China’s Latest PMI Numbers Cause Faster Easing? (FXI, BHP, VGK, FXP, VWO, EEM)
Jim Trippon: China’s (NYSEARCA:FXI) latest preliminary PMI data showed that factory activity continued to slow down for the fifth consecutive month. The numbers confirm that Chinese industrial activity continued to weaken in the face of the slower global economy. Some analysts had expected China’s industrial activity to bounce back from a slower period of its recent Lunar New Year, so the data was met by some investors with surprise. Other analysts offered the view that investors should keep some perspective on the weak numbers, that it reflects nothing new and is far from a comprehensive picture. There were other suggestions that the news will speed up China’s policy easing.
HSBC China Flash PMI
By The Numbers
The HSBC flash PMI indicator gave a preliminary March reading of 48.1, down from the 49.6 February numbers. The survey is conducted by Markit, a UK-based data provider. An index reading over 50 indicates economic expansion, while an indicator of less than 50 indicates contraction. The sub-index of new orders fell to 46.2, while manufacturing fell just below 50. These two categories make up the largest component of the overall index.
New export orders showed continued weakness according to the report, where the data was weaker across the board. While analysts expected the export data to be weaker given the conditions in Europe (NYSEARCA:VGK), one of China’s two largest trading partners along with the US, the surprising weakness in domestic demand was more unexpected. The Chinese government has advocated the long term development of more robust domestic and consumer markets, and had hoped to push its economy more in that direction in the short run as well. To that end, Beijing has been promoting a series of gradual economic easing measures designed to loosen credit for small businesses as well as encouraging greater consumption on the consumer front.
Reading The Numbers
Many investors have been increasingly worried about China’s slowdown. With the drop off of the European export markets, and Europe poised on the precipice of a recession, investors were further spooked by rising fuel prices in China as well as news that iron ore demand for steelmaking was looking flatter. Although the markets reacted negatively, management for iron ore producer BHP Billiton (NYSE:BHP) insisted that its comment about demand was nothing new, that it was merely reiterating what it already had said. China bears, though, have seized on every piece of news regarding the Chinese economic slowdown, yet all the supposed news may soon be regarded as already known if not factored in.
Unpacking The PMI Further
The HSBC China PMI data, for example, especially in its preliminary form, has a heavy emphasis on smaller businesses, those which have been lagging in the Chinese economy. The larger manufacturers, who have been doing more robust business, were part of a 51 reading from the Chinese government’s official PMI in February. Critics will point out that the government’s PMI is usually a couple of points higher than the HSBC reading, but even proponents of the HSBC index will have to admit that a 48 reading carries a different meaning than, for example, the same number in fully developed economy. The 48 reading for China, according to a Reuters’ article, “still implies industrial production growth at a healthy 11 to 12 percent and overall GDP growth around 8 percent.” Markets, however, and China bears, react more to the initial numbers, as the Shanghai Composite dipped mildly by about 0.1 percent on the news.
Faster Easing Ahead?
Beijing, through the Chinese central bank, has been lowering the large bank reserve ratio requirement (RRR), but there’s speculation that the latest data on the economic slowdown may prompt more vigorous cuts, as much as 150 additional basis points, and perhaps even a benchmark interest rate cut. Economic and monetary measures by the government may be expanded, such as money supply and more access to credit, particularly for smaller enterprises. So far, Beijing has been working to adjust the economy gradually rather than employing a massive, comprehensive program. This approach has largely dampened inflation without destroying growth, but the months ahead may see an acceleration of remedies by Beijing, as it may have to deploy its policy tools more rapidly than originally planned.
Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Indx (NYSEARCA:EEM).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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