While the overall PMI was no surprise due to the Flash PMI release, the surprise came from several drivers falling below 50
The China PMI Flash a week ago had foreshadowed what would be a bad PMI reading, but the breakdown by indices was able to disappoint even more.
Hongbin Qu, HSBC’s Chief Economist for China & Co-Head of Asian Economic Research, said:
“The slower growth of manufacturing activities in April confirmed a fragile growth recovery of the Chinese economy as external demand deteriorated and renewed destocking pressures built up.”
Production and orders slow
Production slowed further, barely growing thanks to the slight expansion of new orders. Demand, though, remains bleak domestically, and employment concerns as well as deflation could compound the problem.
New export orders dropped, contracting for the first time in 2013. Demand was weaker across key American, Asian and European export markets, though some pointed out especially weak demand from the U.S.
Draghi’s[1. Mario Draghi, current president of the European Central Bank] remarks on the last ECB[2. European Central Bank] meeting spelled doom for Europe as well, hence it seems that only Japan will be holding the front for China’s exports. Japan actually posted an increase in PMI to 51.1 from a 50.4 in March.
While in past months China was one of the few emerging markets without high inflation concerns, it is now facing a problem with deflation instead.
Both input prices and output prices posted record drops versus the last half year or so. Lower raw material prices caused the drop in costs while the lower prices charged came from price cuts to attract more demand.
Employment likely to drop more
Employment in the sector contracted for the first time in five months. The drop below the 50 point line though was marginal though.
As it was the case with Brazil’s PMI, several respondents mentioned that voluntary resignations and retirements that were not replaced drove the number lower; layoffs were not a significant factor.
While it is positive that the drop was due to natural attrition, this reflects that managers’ demand expectations over the next few months remain quite depressed. If conditions become worse and employment drops, this will have a widespread effect on the economy.
The survey will very likely prompt action from the government to implement policies in the short-term to boost employment, create inflation and boost growth. Nonetheless, it is hard to speculate on the market direction until policies are announced.
In the short-term, there is too much uncertainty to make a bet, though in the medium-term policy responses may be greeted by the market. Additionally, hopefully by year end China’s main trading partners will be stronger and ramp up trade, though the U.S. has had a very long and flat recovery period while Europe seems to be going nowhere but backwards.