China’s Purchasing Managers Index marks continued contraction, more to come

HSBC China Manufacturing PMI 2013-07-01Enlarge GraphFalling orders and rising inventories highlight consecutive PMI contraction

The Purchasing Managers Index (PMI) is a useful gauge of manufacturing activity. In a country like China, where industry accounts for 47% of GDP (according the World Bank), the PMI becomes a key leading indicator of future economic performance. The HSBC PMI survey was released for the month of June. The index came at 48.2, down from 49.2 in May, marking the second reading in a row below the 50-point neutral growth line.

Manufacturing output fell for the first time in eight months, albeit minimally. As new orders continued to fall, inventories built up further. New export orders—in other words, the new business from abroad—fell at the fastest rate we’ve seen since March 2009, coming in at 44.9, which is 4 points below May.

The only bright spot was that inflation fell for the fourth consecutive month, as the input costs dropped for the fourth month in a row. Prices charged dropped as well, as several companies lowered prices to compete, given the additional margin from lower costs.

Contraction likely to continue

The tighter lending conditions in China will likely contribute to and prolong the slowdown in China, as seen in the recently falling price of the iShares China ETF (FXI). HSBC’s chief economist for China stated, “As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months.” The Chinese government is refraining from stimulating the economy in order to avoid exacerbating the real estate bubble it currently faces. Instead, the government has focused on a five-year timeline of reforms that will sprout benefits at best in the medium term.