Manufacturing Numbers Show Cause for Concern in China

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Richard Cox writes: As the global recovery continues to progress, investors as keenly focused on developments in early Asia as a means for gauging whether or not the progress in economic growth is being seen in all areas.  Without clear evidence that emerging markets in Asia have participated in the improvements, there is less reason to believe that the global recovery is moving forward as strongly as had been thought previously.

The latest cause for concern in these areas can be seen in Chinese manufacturing data, which came in lower than market expectations for January.  Of course, the manufacturing sector is a key driver of economic growth in China, so weakness here could be seen as limiting the potential in other areas of the domestic economic (for example in imports and consumer consumption).  The leadership in China has expressed the desire to start to show less of a reliance on the export of low-end manufacturing items.  But if China is not even able to post consistent progress in areas that have been the essential piece of its growth results over the last two decades, these goals start to look less realistic. 

January Manufacturing Numbers

“For January, the HSBC Purchasing Managers' Index (PMI), showed that the monthly manufacturing performance dropped to 49.6 for the period,” said Sam Kikla, markets analyst at BestCredit.  “This is firmly below the 50.5 reading that was seen in December.”  But what is most important about this data is the fact that any performance below the all-important 50 mark is representative of contraction.  So, we are not only seeing declines relative to the previous month, but we are also seeing a decline in the overall productivity result (which, in theory should grow consistently). 

This is the first time in six months that the PMI reading has fallen below the 50 “line in the sand,” and this ultimately suggests that the stronger push that marked the last half of 2013 might now be coming to an end. 

Potential Policy Changes

But even beyond the simple changes in economic trends, there could continue to be policy changes that aim to reform the structural need for China’s manufacturing base to remain consistent and stable.  Policymakers will continue to face new challenges if we start to see regular misses in these types of figures as we head further into 2014.  Of course, the primary concern for Chinese policymakers is to maintain an improving rate of growth, as this is seen as a precursor in guiding foreign investment and the country’s prospects for exports in other areas of the world. 

Policymakers in China have so far cited weakness in domestic demand conditions, and this ultimately undermines the goals in the Chinese government to stoke this area of its economy and provide a means for greater self-reliance.  For these reasons, it will be important to continue watching developments in the PMI figures in order to gauge whether or not the numbers are a one-off anomaly or evidence that the broader trends are changing. 

Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. He writes for MarketBulls.net, BinaryOptionShark.com,TheStreet, Seeking Alpha, and the Motley Fool.Investing strategies in these articles are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally suggestive of time horizons of one to six months.

© Copyright Richard Cox 2014

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