Sunday, 3 June 2012

China Update - Housing Market and Manufacturing

The first bits of data that come out of China each month are the PMI (a measure of manufacturing) and the Soufun 100 Index (a measure of house prices). The housing sector and manufacturing sector remain critical to the near term prospects of China's overall economy and macro policy positioning. So with these two data points you can get a leading view on how China's economy. And what do they say?

The official manufacturing index came in at 50.4 (53.3 previous, 52 expected), while the private HSBC Markit index came in at 48.4 (49.3 previous). The main driver of the drop in the official index was a 4.3 point drop in the production index, and a 4.7 point drop in the new orders index; the raw materials inventory index also shed 3.4 points to 45.1. The only positive point really was the 10 point drop in the prices index to  44.8, which points to lower inflation - a necessary precondition for any monetary policy easing.

However manufacturing is only one side of the economy. The Non-manufacturing PMI index came in at 55.2 (56.1 previously). New orders slipped 0.2 to 52.5, while the intermediate inputs price index fell 4.3 to 53.6, interestingly it looks like some of the input price drop was passed onto consumers with the prices charged index falling 1.8 to 48.5, which furthers the case for falling inflation. The other point to note is that the absolute level of the non-manufacturing PMI shows relative resilience of the sector; which lines up nicely with the Chinese government's plans for rebalancing growth and looking for more quality growth.
And speaking of rebalancing growth, the authorities will be pleased with the May housing data. The Soufun 100 City Index dropped -0.31% month on month (-0.34% previous) or -1.5% year on year (-0.7% previous) to an average 8,684 Yuan per square meter. The measure is off 196 Yuan since the peak of 8,880 in August last year. The 9 straight months of declines reflects the moves by the authorities to tighten credit conditions, caps and penalties on ownership of multiple houses, and other anti-speculation measures. It also fits nicely into the Government's plans for improving housing affordability, which includes massive scale social housing construction projects.

So what's the overall takeaway? Manufacturing activity is slowing, non-manufacturing activity is expanding; but at a slower pace. Input price and consumer price inflation is likely continuing to ease, and house prices are under continued pressure from government controls.

At this point this is all consistent with a soft landing. While things are slower than during the investment boom of the mid 2000's and the post-GFC stimulus, the Chinese economy is looking relatively healthy, and will continue to expand. The best part of these results is the apparent moderation of inflation pressures. This only increases the government's options should activity slow further. And if the past few years have taught us anything, it's that the Chinese authorities are more than capable of responding to a major downturn in activity.

by Econ Grapher
www.econgrapher.com

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China Update - Housing Market and Manufacturing
http://www.alleconomists.com/2012/06/china-update-housing-market-and.html

6 comments:

  1. Interesting update, I am inclined to agree with you on the soft-landing argument. China's economy actually seems to be holding up pretty well considering what's going on in Europe. But even if things do go down the plopper at least they have plenty of dry powder!

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    1. Thanks. It is also worth noting that the Chinese authorities have announced about 46 billion yuan of subsidies for green vehicles and energy efficient appliances; this will be good for consumption, selected manufacturers.

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  2. Not sure how one can discuss all of this without mentioning Europe once, particularly in your conclusion. You seem to attribute all of China's economic slowdown to domestic policy moves--a very dangerous assumption, which i strongly disagree with. China does not have enough domestic consumption to make up for the slack coming out of the nations it exports to.

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    1. China has ample capacity to ride out a Euro storm. All they would need to do is issue a couple of directives for large scale construction projects to go ahead, slash interest rates and ease credit conditions, and add to consumer related subsidies. Would it be sustainable? Of course not, but it would buy them a couple of years of boosted activity. The question then would be whether Europe et al had gotten back on track in time to take over from stimulus measures.

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    2. I agree, China has much greater capacity to counter downturns. But it is valid to note that there are significant downside risks. But I think maybe 70% of the slowdown in China that we've seen is related to government measures put in place last year to curb inflation pressures.

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  3. Today's rate cut of -25bps to 6.31% serves to illustrate the point that China has the capacity to respond. But will be interesting to see the data later today - methinks will be softer!

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