Betting on a Chinese stock rebound? Crude tankers might be better

Part 2
Betting on a Chinese stock rebound? Crude tankers might be better (Part 2 of 13)

Why China’s initial March PMI could be bad for oil tankers

The importance of China’s PMI

The HSBC flash China manufacturing PMI (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 purchasing managers are sensitive to changes in business activities, analysts often view their perspectives as leading indicators. As oil tanker shipping demand closely ties to China’s oil consumption growth, PMI data has a large influence over Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation Ltd. (TNP), Nordic American Tanker Ltd. (NAT), Frontline Ltd. (FRO), and the Guggenheim Shipping ETF (SEA).

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Eight-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.

For March 2014, the HSBC flash China manufacturing PMI hit an eight-month low of 48.1, compared to February’s final reading of 48.5, reinforcing concerns about further slowdowns and collapses. As the Chinese Lunar New Years comes to pass, data becomes clearer. But March’s preliminary data was even more disappointing than the first two months of this year.

Expectation of policies

Most of recent slowdown, however, has been priced in. Last Friday, China’s Shanghai stock exchange jumped on expectations that the government would do something to prop up growth a bit. On March 24, it jumped again.

Without the government’s support, this decline is likely to continue into the second quarter. The HSBC China manufacturing PMI is weighted more towards smaller and private companies than the official index, which may suggest that the tightened money supply hurt private companies much more than state-owned companies—perhaps in those select industries with overcapacity that the Chinese government wishes to weed out and consolidate.

Hongbin Qu, the chief China economist at HSBC, comments in this report that HSBC expects Beijing policymakers to “launch a series of policy measures to stabilize growth,” including more spending on infrastructure as well as reduced barriers to private investment. These policies may have already been on the way, because Chinese Premier Li Keqiang said last week that there would be public investment and construction plans to ensure domestic demand expands at a stable rate.

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