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The Flash PMI for June posted a further slow down, augmenting concerns that China will favor reforms over short-term stimulus
The Purchaser Managers Index is a monthly survey that gauges the manufacturing sector. In several emerging markets the survey is sponsored by HSBC and collected by MarkIt. In the case of China, which is a key market investors worldwide like to follow, a flash (or preview) is available 10 days before the month end. The Flash PMI contains approximately 85-90% of responses and is, therefore, a very good gauge of what the final PMI will come at.
Lower order and production pushes PMI further down
The PMI shocked investors in May when it fell below the 50 point neutral growth line, implying a contraction of the economy. Now in June, the trend is confirmed after dropping decisively further to 48.3 from 49.2. The survey is now at a nine month low and with a clear slow down trend.
The key drivers of the drop were the reduced new orders and production. Both new orders and new export orders fell below the 50 point line, supporting the fears that demand has slowed down significantly. Additionally, production crossed the 50 point line and changed its previous growth for contraction as the lack of new orders in previous months hits production.
Employment continued contracting as backlogs shrunk due to the reduced demand and new orders. Inflation dropped both in costs and prices charged, with both elements relatively flat well below the 50 point line.
HSBC Chief Economist in China, Hongbin Qu, stated the following:
“Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures. Beijing prefers to use reforms rather than stimulus to sustain growth.”
Reforms over short-term stimulus
The market was left waiting for an announcement from Beijing regarding some kind of economic stimulus. The Chinese government, pressured by an apparent housing bubble of their own, would rather not instill short-term stimulus as it would exacerbate the issue.
It is now more likely that Beijing will simply continue its reform agenda, but this will generate economic growth at least until a few months from now, which means the market may continue to hurt throughout the second half of 2013.
© 2013 Market Realist, Inc.