China’s PMI confirms severe Asian weakness (Part 2)

Continued from Part 1

Employment in free fall

July marked the fourth month in a row in which manufacturers shed jobs. Some respondents mentioned that a combination of downsizing and resignations were the main drivers, though the resignations part is hard to believe.

HSBC China Manufacturing PMI 2013-08-05Enlarge Graph

Deflation continues, though slower

Both input and output prices were lower in July. The drop, though, was slower than in June. The lower input prices were the result of lower raw materials due to depressed global conditions, and the lower output prices were the result of manufacturers lowering prices to attract demand.

Is help on the way?

Overall conditions in China (FXI) seem primed for government intervention. The lower production values imply that unless some kind of stimulus is injected into the economy, China will miss its 7.5% GDP target for 2013.

The weaker unemployment could be the trigger of stimulus—though for now, it seems the government is preoccupied more with the credit crunch facing government agencies. Additionally, the lower inflation means unwanted inflation won’t be an obstacle to stimulus.

But the government of China was quite clear that any stimulus would be targeted at strengthening consumer demand, so perhaps the services sector will benefit more than manufacturing.

China’s Services PMI

Continue to Part 3