China's June flash HSBC PMI was weaker than expected, coming in at 48.3, down another big notch from the 49.2 recorded in May. New export orders were especially weak. While we weren't expecting to see any recovery in this index just yet, the further sharp fall was an unwelcome surprise.
result has opened up an even bigger gap between the HSBC index and the official
PMI (at least up to the latest reading in May).
So which one is right? Given
their different makeup, they are both an important part of reading the Chinese
economy. The HSBC index is oriented towards
the small and medium sized enterprises (SMEs) while the official index gives a
better picture of the overall manufacturing sector. With the HSBC index capturing the SME sector
it is also more highly correlated with exports than overall economic growth.
differences in the construction of the two indices notwithstanding, the latest
result puts a further dent in my China cyclical upturn story. The year to June GDP result looks like coming
in at 7.6% rather than the 7.8% I had pencilled in. I have already lowered my
calendar year GDP forecast for 2013 from 8.2% to 7.9%, which now has more
downside than upside risk attached to it.
While I don’t
like revising forecasts (I find it’s vastly preferable to be correct right from
the start), lower growth in China is not causing me a high degree of
consternation. Our long-term China story
is one of a move to a structurally lower level of growth. That’s as the easy gains from urbanisation
and productivity have been had and as the economy rebalances towards
consumption from the previous growth model of investment and exports.
the authorities don't seem concerned either, apart from some liquidity
injections last week to reduce high short-term interest rates. The focus for them seems to be very much on
structural reform rather than initiatives to boost near-term growth. While that means lower growth in the years
ahead, it also means more sustainable growth.
As long-term investors, we should be ok with that strategy.