Lower Chinese PMI: Canary in the Coalmine?

By: Prieur du Plessis | Tue, Mar 2, 2010
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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.

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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