For the first time in seven months the Chinese Purchasing Managers Index (PMI) fell as the HSBC PMI (Flash) fell to 49.6. Any number below 50 indicates that the economy is contracting instead of expanding as the final HSBC PMI measured 50.4 in April. The contracting manufacturing industry in China shows that the country will have a difficult time reaching its 7.5% target growth rate for 2013 and additionally it implies that the global economic recovery is stalling after several months of positive data.
Internally, the government has to decide whether or not to change their monetary policy in an attempt to stabilize manufacturing activity or allow the slowdown to continue and focus their efforts on boosting domestic demand for goods. Currently, China generates the majority of their GDP growth by attracting foreign investment and exporting a wide array of goods. Globally, the slowing of the Chinese economy has massive ramifications throughout the world economy as many commodity prices are tied to the demand from China which will drive their prices higher or lower, several currencies are tied to their country’s ability to export to China (i.e. Australian dollar), and the pace of Chinese economic growth is an important barometer to measuring the growth of the global economy.
As part of the PMI measurement, the sub-index of New Orders fell to 49.5 which shows that there are not enough new orders being placed to push the country’s economic expansion higher. This sub-index is extremely important to watch because it shows future potential growth and when this sub-index begins to contract, the PMI will most likely follow suit (and vice versa). With the falling New Orders sub-index and falling PMI, Chinese domestic demand is weak and unable to make up the slack given by the global economy. This is the dilemma that the Chinese government faces, do they focus on continuing to grow their export markets or do they focus on strengthening domestic demand. If the country wants to generate long term success, they will focus on strengthening the Chinese consumer, but, with the markets irrationality and the need to please investors, the government will have to strike a balance between generating higher levels of growth and creating long term sustainability.
In order for the global economy and many advanced economies to create and sustain growth (including Canada), the Chinese economy must find its footing and stabilize its growth rates. The historical phase of expansion which saw the Chinese economy produce double digit growth rates may be over as the country is transitioning into a different phase of wealth and growth. However, the market is looking for stable and expanding growth, if China is able to create consistent positive growth, the markets will respond in kind.
Chart was captured from: http://www.bloomberg.com/quote/CPMINDX:IND