Lower Chinese PMI: Canary in the Coalmine?
China's PMI numbers for February were released yesterday and received surprisingly little media attention. Although I am usually not keen to slice and dice single-month statistics too intensely, the latest suite of manufacturing indices does seem to warrant more than cursory attention.
Firstly, a summary of the numbers as provided by the China Federation of Logistics & Purchasing (CFLP) and reported by the Li & Fung Group.
PMI Report on China Manufacturing: February 2010
The rate of expansion of China's manufacturing sector that accounts for more than 50% of the economy has moderated sharply, with the overall PMI falling to 52. Just on its own (excluding the non-manufacturing sector) it seems as if China's year-on-year economic growth in the second quarter could slow to 10% and even less.
The following graph provides the same information, but over the longer term.
The manufacturing industry has started to shed excess inventories as stocks of major inputs indicate contraction. This does not bode well for metal prices in at least the short term.
New orders are still expanding but at a significantly reduced pace. However, new export orders fell sharply from 53,2 to 50,3, indicating only marginal expansion. New orders and new export orders lead the Economist Metals Index by approximately one month. The drop in especially new export orders does not augur well for metal prices and downside pressure can be expected.
The roll-over in new export orders is particularly evident and the question is whether this could indicate a trend change.
The drop in both new orders and stocks of major inputs perhaps explains the weakness in the Baltic Dry Index. Imports of raw materials such as ores and metals have probably dropped significantly.
A major question is how the slowdown in China is going to affect the rest of the global economy. The contraction in China's PMI for imports indicates that the US GDP-weighted PMI for exports could be negatively influenced in especially the second quarter of this year.
Likewise the US GDP-weighted PMI for imports could be under pressure ...
The further austerity measures put in place recently by the Chinese authorities still need to rub off on China's economy. As such the outlook for commodities, the US and global economy has possibly darkened somewhat.
Elsewhere, the PMIs of India and South Korea were also published, with both economies expanding at the fastest pace in nearly two years. There are already calls for India to suspend the stimulatory measures in order to cool the economy.
One swallow does not make a summer, but I will be monitoring the Chinese situation closely to try to gauge the possible impact of any cooling on the developed economies.
Note: The graphs in this post were provided by Plexus Asset Management (based on data from CFLP, ISM, I-Net Bridge and Dismal Scientist.
Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.