China PMI: One Month Does Not A Trend Make

The HSBC study of China’s purchasing manufacturing index, which closely parallels the official numbers from the People’s Republic, dropped to 54.4 from 55.3 in November. Analysts seized on the data to say that monetary tightening in the world’s second largest economy was effective and that inflation would be less troublesome than expected.

The information should also lead to the conclusion that China’s export will drop modestly. That could cause its balance of trade with countries like the US to be less one-sided in favor of China’s exports.

Short term data about the Chines economy is nearly always magnified by experts on the country’s business trends. This is because China’s business and financial activity have such a large effect on the other national economies. It is supposed that inflation in China will mean higher commodities worldwide. High oil and agricultural commodities prices could derail the recovery in the US, UK, and EU.

China may also use the PMI to make the case that the yuan is fairly valued and that the economy of the world’s most populous nation is not growing fast enough and its exports are not surging enough to severely damage the GDPs its trading partners.

Each set of monthly economic data from China renews a new round of propaganda again and again. Not all of the posturing comes from China.  Western nations will claim that China’s PMI could pick up quickly next year. The People’s Republic will counter with the argument that if it can control inflation consumer spending in the country will rise as the middle class’s earnings are eroded less by price increases. The last argument is easily debated. Chinese factory workers continue to press for higher wages, which will drive some level of inflation all by itself.

China experts now get to wait a month for January data. Perhaps the lack of growth in the US economy and the slowing of GDP expansion in Europe caused by austerity budgets will smother the demand for China’s exports. Or, China may find ready markets in the developing world and among its own population. It is hard to tell what the China PMI numbers mean, and it will not become easier to decipher them any time soon.

Douglas A. McIntyre