China’s PMI Drop Adds to Concerns over Global Recession

November 25, 2011 Posted by China Briefing Reading Time: 3 minutes

Nov. 25 – The HSBC flash purchasing managers’ index (PMI) – the preliminary readout of China’s industrial activity – fell sharply this month to 48 from October’s 51, reflecting signs of a domestic economic slowdown. The contraction of China’s manufacturing sector has further unnerved investors who are already fearful of an expanding global recession amid persistent signs of a struggling U.S. economy and the rampant debt crisis affecting the Eurozone.

PMI plummet
With a reading above 50 indicating expansion, and below 50 signalling contraction, November’s flash PMI reached a 32-month low, revealing a decline in both industrial output and new orders even as export orders continue to grow.

The output sub-index plummeted to 46.7 from October’s reading of 51.4, the lowest since March 2009; new orders also sank well below 50, the sharpest drop in the past 18 months.

HSBC Economist Qu Hongbin said the PMI data suggests that China’s industrial output growth will slow in the coming months to an annual rate of 11 percent to 12 percent, down from an average of 14 percent seen this year.

While Qu believes there is no need for investors to panic, as the industrial slowdown will still keep China on track for a soft landing, Kevin Lai, senior economist at the Hong Kong-based Daiwa Capital Markets, is less optimistic. Lai warned that the probability of an economic hard landing (growth of less than 8 percent) in the first quarter of next year still stands at as high as 25 percent.

The World Bank also confirmed a downward trend in the Chinese economy, forecasting on Tuesday that China’s GDP growth will slip to 9 percent in 2011 and then decline even further to 8.4 percent in 2012.

Financial markets down
Financial markets suffering from a pessimistic Western economic outlook were further frustrated by the release of the disappointing PMI data.

The Australian dollar dropped to a six-week low, carrying worries that demand growth from Australia’s largest trading partner and export market will ease.

Asian shares dropped more than 2 percent on Wednesday and China-shares touched the lowest point in nearly a month, down by 0.7 percent.

China’s cement producers and coal miners led the falls, as the HSBC PMI sub-indices for the two sectors both dropped significantly. On the Hong Kong Stock Exchange, China Coal lost the most among all shares by 4.9 percent and the shares of China Shenhua – a giant energy company that mainly engages in coal production – marched down by 3.6 percent.

At China’s A-share market, Anhui Conch Cement dropped by 1.97 percent, while Tangshan Jidong Cement fell by 1.67 percent.

China’s domestic industrial weaknesses also struck the U.S. stock market, where all three indices dipped by over 2 percent on the day.

Fine-tuning measures
Most economists believe the steep PMI drop will offer the Chinese government more room to select fine-tuning measures, but is not necessarily indicative of a collapse.

“It’s not like 2008,” said Ting Lu of Bank of America/Merrill Lynch. “There’s no need for China to be in a hurry to roll out measures. The Central Bank needs to become more flexible and watch the unfolding crisis. It’s not the time for them to change policy stance.”

HSBC’s Qu echoed Lu’s opinion, as he believes China will be less affected this time than it was back in 2008 because of the country’s reduced reliance on external demand.

However, some economists suggest that, as the economy weakens, Chinese policymakers could take further steps in the months ahead, in addition to a few selective measures that have already been employed to support the country’s small businesses. A cut in the reserve requirements for banks may be the first thing in the cards within the next three months, said Tim Condon, head of Asia Research at ING in Singapore.

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