Why China’s purchasing manager’s index is at a 7 month high
The importance of China’s PMI
China’s HSBC Flash Manufacturing purchasing manager’s index (or PMI) is published monthly by Markit Economics. It’s published ahead of the final PMI. It’s the earliest indicator of manufacturing activity in China. The HSBC Flash Manufacturing June PMI came in at at 50.7 compared to May’s reading of 49.4. It’s the first time in 2014 that the PMI has crossed 50, reflecting signs of expansion.
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The oil tanker shipping demand is closely tied to China’s oil consumption growth. As a result, the 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).
Major highlights of the report
Nine out of the 12 sub-indices reflected improvements in the June readings. Since March, 2013, new orders have increased at its fastest pace. Output also increased for the first time since January. Inventory of finished goods has been declining at its fastest rate since September, 2011. This clearly indicates rising demand. The rate of job cuts has also eased, which has lifted the positive market sentiment among consumers.
A sub-index for export orders edged up to 50.3 in June from 49.3 in May. The new orders measure both foreign and domestic demand, which inched higher to 52.8 in June from 52.3 in May. This marked the highest reading since October, 2013.
China’s economy has shown encouraging signs as the governments’ policy measures have taken shape. Policy measures include lowering the reserve requirement for more banks to boost lending, increasing the scale of re-lending and bond financing to support smaller firms, and hastening construction of railways and public housing projects.
Expectation of policies
According to the HSBC report, over the next few months, infrastructure investments and related sectors will continue to support the recovery. Policy makers are expected to continue their current path of an accommodative policy stance until the recovery is sustained.
Qu Hongbin, chief economist for China at HSBC, commented that the economy continues to show more signs of recovery. This momentum will likely continue for the next few months. It’s supported by stronger infrastructure investments. One downside risk the economy faces is the property market. China’s major cities are experiencing a decline in housing prices. Analysts believe that Beijing will adopt some more targeted measures for the real estate sector.
With the Chinese government putting effective policies in place that support the economy growth, the PMI should sustain its level above 50, indicating high expansion. The crude tankers industry is largely connected to the growth of the Chinese economy. The industry will likely benefit from the government measures.