Critical analysis: China's key dry bulk shipping indicators

Part 4
Critical analysis: China's key dry bulk shipping indicators (Part 4 of 6)

1 key Chinese release that can mislead dry bulk shipping investors

What is China’s flash manufacturing PMI and why is it important?

The HSBC flash China manufacturing purchasing managers’ index is published monthly by Markit Economics ahead of the final PMI, which makes it the earliest indicator of manufacturing activity in China. Since manufacturing purchasing managers are most sensitive to macroeconomic changes, their purchasing decisions can largely reflect current manufacturing market conditions that are closely tied to dry bulk shipping demand.

HSBC flash PMIEnlarge Graph

China’s February flash manufacturing PMI hit a seven-month low

PMI ranges from 0 to 100, and 50 is often considered by many economists, analysts, and money managers to be the cutoff point for expansion (50 and above) or possible contraction (50 and below). The farther the number is from 50, the stronger the expansion or contraction.

Unfortunately, the HSBC flash China manufacturing PMI fell to a seven-month low of 48.3 in February from January’s final reading of 49.5, reinforcing concern about the economic slowdown. As shown in the graph above, all of the manufacturing indicators—including production, new orders, and employment—have smaller index figures.

PMI doesn’t tell the whole story

As key as PMI is, this index alone can’t tell the whole story of China’s manufacturing outlook—especially when other indicators such as trade growth and credit expansion are looking good. Investors shouldn’t solely rely on this index to make their decisions.

Reading too much into this index is meaningless for now, because the current snapshot of China’s economic activity is somewhat distorted by the New Year holiday. This year, the celebration began on January 31, and the entire month of February was affected. The New Year partly accounts for the reduced production and employment, because manufacturing companies shut down during this holiday, and many part-time workers in the manufacturing sector choose to switch jobs when they come back to work.

A relatively low figure may encourage further reform 

This year, Beijing policymakers aim to achieve GDP growth of 7.5%, but this requires further reform and meaningful economic policies. If the central government is still hesitant about making changes, this relatively weak number may encourage it to allow more new loans and a looser monetary policy for the purpose of helping stimulate the economy. After all, the government has to maintain the growth rate at a certain level to ensure fuller employment and social stability.

Hongbin Qu, the chief economist of Asian Economic Research at HSBC, remarked, “We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year.” As long as China’s economy grows at a stable rate, it will benefit major dry bulk shippers.

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