China’s manufacturing activity continues to slow down. Today’s Markit/HSBC Purchasing Managers’ Index (PMI) came in at a seven month low for February. Once again, worries regarding the health of China’s economic strength are coming to the surface, as slowdown concerns develop.
The private PMI came is below contraction level at 48.3. The final reading for January came in at 49.5. Remember, a reading of 50 and above indicates expansion, anything below that indicates contraction. This is the second straight month that this indicator has fallen to below 50.
We are clearly seeing a slowing of economic activity in early 2014. This could be from the tighter credit in Q4 2013, which has made inventories harder to finance. This has caused manufacturers to destock this month.
Swift Reaction from Asian Markets
In the Forex market the AUD/USD currency pair quickly sold off and is currently trading 0.8948, at the time of this report. Australia’s ASX 200 also quickly turned negative, then recovered, and is currently trading down about six points at 5,402.40. China is Australia’s main importer of metals and goods, where China goes economically has a big effect on Australia.
Since the initial shock, China’s mainland benchmark, the Shanghai Composite, also pared gains and is currently trading up eleven points at 2,154.32. The Nikkei, in Japan, is down over 1.68 percent.
Looking into the PMI number, we see that new orders fell to 48.1 from 50.1 in January. Production also fell from January’s 50.8 to 49.2. New export numbers, defied the trend, and rose from 48.4 to 49.3.
Going forward, China will start to struggle with any rebound. The last two PMI readings are reinforcing a view that the recovery in China might not be sustainable. We could see the gross domestic product (GDP) slow to 7.5 percent on a per annum basis in the first quarter. Then it will slow even further to 7.1 percent in the second quarter. While, a healthy growth rate, it is below the target set by the Peoples’ Bank of China (PBOC).
In order to help avoid this slowdown and stimulate the growth rate, the PBOC and Beijing will loosen monetary policy and the second quarter of 2014. This will encourage factories to restock and increase output, thereby supporting growth.
Oddly, earlier in the week, we saw the PBOC taking out $7.9 billion from money markets. This comes after a boom in lending earlier in January. This is a clear signal that China wishes to continue to reign in credit and monetary policy. Possibly to continue to let the air out of the ever growing real estate bubble.