So much for the hard landing theory.
China’s manufacturing sector made a strong recovery in March, according to the official data.
The purchasing managers’ index – a key indicator of factory activity – came in at 53.1. A number above 50 indicates that the sector is expanding. Economists had expected a reading closer to 51.
Sounds like good news. There’s just one problem: it completely contradicts another independent survey that came out earlier last month.
So who’s got it right on China?
The trouble with statistics
As is the case with a lot of economic data, the answer you get to a question sometimes depends on who you ask.
The semi-official China Federation of Logistics and Purchasing’s PMI measure says that factory activity is growing strongly. But another measure – the HSBC Markit PMI – says it is slowing sharply.
This particular measure fell to 48.6 in March. That was the fifth straight drop in a row, and it’s getting worse. That’s a pretty big gap – the two directly contradict one another. They can’t both be right. Why the huge difference?
Tom Orlik in The Wall Street Journal points out that the semi-official version is skewed towards large, state-owned enterprises. Life is always going to be easier for them than it is for the small private firms. So that’s one reason for the difference.
The semi-official measure is also poorly seasonally adjusted, reckons Orlik. What does that mean? You seasonally adjust data to make up for the fact that certain times of year are always stronger than others.
For example, the British housing market is stronger in spring than at Christmas, so many of the house price indices adjust for this. This is designed to remove some of the ‘noise’ from the overall data sets.
However, the compilers of the semi-official measure don’t seem to do this very well. Orlik notes that on average, there has been a significant March bounce every year since 2005. This is due to staff returning to work after the Lunar New Year. So this could also be skewing the semi-official data higher.
That’s all very well. But it still doesn’t account for the vast difference in direction. Gordon G Chang of Forbes has a more cynical view: “Either there has been a sudden and structural change in the Chinese manufacturing sector in the last few months or the China Federation has just been making up its number at the direction of Beijing.”
Certainly Zhang Liqun of Chinese think tank, the Development Research Centre, tells the FT that growth is likely to slow further. “Looking at the PMI itself, it would seem that economic growth is recovering, but there is a clear difference if you look at market demand and the real economy”. Data on exports, investment and retail sales have all been slipping back in recent months.
China’s conversion to a consumer-led economy won’t be easy
Both the bulls and the bears have reason to argue that the upbeat data is wrong. The bulls are betting on China easing monetary policy and giving the economy more of an artificial boost. If the economic data comes in better than expected, then there won’t be any extra monetary boost to drive stocks higher.
Of course, you can argue the toss on this kind of thing until the cows come home. Either you believe the semi-official data or you don’t.
The real problem is that even a ‘soft landing’ for China is going to feel hard for lots of the companies and individuals who have been riding the China boom higher in recent years.
If China really wants to move more towards being a consumer-led society, then that’s bad news for the companies that have been benefiting from its existing growth model.
China’s huge investments in infrastructure and property are almost certain to slow down. Regardless of what else happens to monetary policy, China’s leaders seem very keen to crack down on booming property prices, which in China, as everywhere else, are a very visible sign of social inequality.
China has been the commodity consumer of last resort for years now. If that changes, then it’s hard to see how it can be anything but bad news for industrial metals and the like. There simply isn’t another country with the appetite to pick up the slack – even if the US economy recovers.
As newswire Bloomberg points out, even a minor slowdown on last year’s growth of 9.2% would “offer little comfort for Australian mining company BHP Billiton, seeing slower steel production in China, or German automaker Daimler, whose Mercedes dealers in the nation are giving record discounts.”
And as James Ferguson noted in our roundtable in a recent issue of MoneyWeek magazine, China won’t find the process of building a consumer-led economy easy. Apart from anything else, building a consumer boom on the back of a tumbling property market isn’t a good start. So it could have a much harder landing than anyone expects.
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