Research firm Markit announced that its joint monitoring of China’s PMI, done in tandem with HSBC, predicted a surprising slowdown in February. The brief report’s most important observation was “Flash China Manufacturing PMI™ at 51.5 (54.5 in January). 7-month low.” Since a number below 50 represents contraction, China’s factory activity will barely rise based on this latest measurement.
The analysis for the slowdown also said:
“Flash PMI data point to a meaningful slowdown in the industrial sector in February. Chinese New Year Holiday may be a factor but not the only reason. It also implies that quantitative tightening is starting to filter through yet more still needs to be done to check inflation.”
But, there could be another and more menacing reason. Exports may have slowed due to tepid consumer demand in the US and parts of Europe and Japan. There is still a concern among economists that unemployment and consumer leverage have prevented a full recovery of consumer spending in America. The extension of tax cuts does not appear to have unleashed a surge in spending. Factory expansion in the US has strengthened, but that will only affect a small amount of the American import base.
The Chinese may have had some success in muting inflation and the purchase of real estate. New bank regulations may have slowed bank lending. Bank activity has not erased the total of the liquidity created by the $585 billion stimulus package and wide-open lending activity a year ago. That capital cannot be wrung out of the economy overnight.
China’s factories may also have slowed production as margins shrink. Many of China’s industrial workers have successfully lobbied for higher wages. Oil and agricultural commodities prices have spiked. Manufactures do not have much incentive to quicken production if their break-even points have been reached or exceeded.
The temptation is to blame the slowdown of PMI on China’s new bank regulations. That analysis is flawed.
Douglas A. McIntyre
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