China manufacturing skips a beat

The heartbeat of China’s manufacturing slowed down a tick, triggering a panic attack among stock markets in Asia, but economists reason that “overly pessimistic” fears of a “collapse” or a “hard landing” of the Chinese economy misread the effects of a “policy-led soft landing”.

The official Purchasing Manufacturers Index, a measure of the state of health of the manufacturing economy, fell to 52.1 in June from 53.9 in May, somewhat weaker than expected.

A reading above 50 confirms expansion in manufacturing activity, but the sub-indices for output, new export orders and backlogs of work, imports and employment all fell marginally during the month.
A second PMI index compiled by HSBC, which focuses on smaller, private firms, fell more steeply to a 14-month low of 50.4 from 52.7 in May; output and new orders fell for the first time since March 2009, again reflecting softness in the economy.

Although the latest data from China caused stock markets in Asia and Europe to fall owing to concerns that the global economy was faltering, economists dismiss such fears as a misreading of what’s really happening in China.

“Fears about a hard-landing (of the Chinese economy) are overplayed,” says HSBC’s chief China economist Qu Hongbin. “The moderation in the manufacturing PMI implies slower sequential growth in China’s manufacturing sector, partly due to the tightening measures taking effect.”

Societe General’s chief Asia economist Glenn Maguire concurs with that assessment. “It is clear that the Chinese economy is decelerating... It is not collapsing.”

Barclays Capital economist Wengsheng Peng cautioned against “being overly pessimistic.” While the weaker-than-expected PMI readings, together with the recent equity market sell-off, would “likely lead to more concernd about China’s growth outlook,” he believes these are the effects of a “policy-led soft landing - a slowdown that is desired and targeted by the government this year.”

Although Peng sees “moderate downside risks” to his China GDP growth projection of 10.1% for 2010, he reckons that the risks of a “hard landing or a double dip” are “small”. In his estimation, “there is policy flexibility to support growth if the slowdown turns out to be sharper than policymakers desire.”

Maguire too points out that Chinese policymakers have plenty of wiggle room.   

“If growth slows more materially than we are forecasting - and we acknowledge it as a low-level risk at this time - we would expect the (central bank) to provide guidance from stronger lending in the third and fourth quarters of this year, and the bank lending target lifted to bring China’s enormous pipeline of industrial activity on-line more quickly,” he adds.

Moody’s Economy.com  economist Alaistair Chan reasons that new orders likely fell because clients held off on orders owing to the recent jump in global financial market volatility and concerns about the global recovery.

“There is potential for sentiment to improve in later months, and if the decline in orders was due to uncertainty about the global recovery, then good news on that front could see a rush of pent-up demand.”

Additionally, Chan points to another silver lining: the sub-index with the sharpest decline in June was input prices, which fell 7.6 points to 51.3 (in the official survey) following a 13.7 point decline in May. “This reflects a decline in commodity prices and could help cool inflation and reduce the need for further tightening measures by the government,” he says.

Overall, the June PMI data “confirms that the manufacturing sector still remains in a solid expansion stage,” says Nomura Securities analyst Sun Mingchun. “If the decline does not continue for too long, it should prove a healthy correction that reduces the risk of the economy overheating, which has been our main concern this year.”