Monday, June 24, 2013

China's Divergent PMIs

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.

This 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.

The 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.

Importantly, 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.