Anyone that has been watching either the Chinese stock market or commodity prices for the last six weeks won’t be surprised that we received a couple of data points this morning that confirm economic growth is slowing incrementally in China. The first, the official China Federation of Logistics and Purchasing managers index fell to 53.9 in May from 55.7 in April. The second, the HSBC China Manufacturing Purchasing Managers Index, fell from 55.2 to April to 52.7 in May – which is the lowest level in a year.
Despite the sequential decline, both of these indices are still above 50, which denotes expansion in economic activity. We’ve outlined this sequential change from April in the chart below, and would highlight that 54 on the Chinese PMI reading has historically been a bit of an important line, and the next move will be critical to watch.
Interestingly, the most noteworthy change in the Purchasing Managers Index was a change in input prices, which fell dramatically from April’s reading of 72.6 to 58.9 in May. This implies that underlying unit demand was likely moderately stronger than the headline number suggests, which, perversely, is probably a negative leading indicator for the next PMI data point. Presumably, the Chinese government will look at the components of the index, and realize that their efforts to slow the economic growth, or potential overheating, are working on the margin, but perhaps not slowing the economy to the extent Chinese officials had hoped.
This interpretation, in conjunction with some of the recent inflationary data points from China that we’ve highlighted below, could lead to more aggressive tightening from China. These inflationary data points include:
- Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
- Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
- Chinese money supply growth was up 21.5% year-over-year in April;
- Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
- Chinese industrial production was up 17.9% on a year-over-year basis in April.
Obviously, these are primarily April numbers, so May data will also have to be appropriately inflationary to warrant further tightening, but while the headline PMI numbers suggest some economic slowing, the internals are less supportive and suggest still robust expansion in China.
Daryl G. Jones