Chinese slowdown is here to stay

The HSBC China PMI fell to 49.4 in July, showing a contraction in the economy. Although the government’s PMI for July was reported at 51.2, and still expanding, this distinction is largely superfluous as the deceleration is obvious from both accounts. The government’s survey differs from that of HSBC in that it focuses more on large and state-owned companies.

The economic slowdown, though expected, still buoyed the Chinese and regional markets. Are their hopes for new stimulus justified? I would think no.

The side effects from the first try are still very pronounced in China. CCTV, China’s state-owned television station and not exactly known for exposing the darker underbelly of the nation, ran a program recently about a “ghost city” in Tianjin, housing developments that are largely vacant due to speculative demand. Inflation on foodstuffs is over 10%. Contrary to popular belief, the 1989 Tiananmen Square protest was really driven by runaway inflation. So the CCP, mindful of their “mandate of heaven”, will most likely stay on the cautious side and refrain from having another puff of addictive stimulus.

Is China cooling off?

The April HSBC PMI released today seems to suggest so.While still expansionary, the index fell to a six-month low of 55.4. On the other hand, the official government index released on May 1 showed a slight improvement, due most likely to different models being used for seasonal adjustment and the fact that HSBC index focuses more on smaller, privately owned companies.

But there are signs that the tightening measures are gradually working through the economy. It’s been reported that the banks are scrambling for deposits as the PBoC withdraws liquidity and raised reserve requirements. Volume for property sales has collapsed, by as much as 60% in Shenzhen. Buttressed by fat profits last year, the developers have mostly avoided cutting prices so far. But if volume continue to wither, pricing pressure will eventually be felt, especially when the new property tax and massive new supply got rolled out.

The melodrama on the other side of Eurasia also demands attention. Contrary to popular perception, the EU is actually China’s largest export market. The RMB’s dollar peg means that it has racked up huge gains against the euro. After all,  there was a reason why the Europeans were mum on currency issue during the recent G20 summit. Troubles with your largest customer could hardly be positive for business.

So is China starting to cool off? I don’t think so, not for now anywayz. Although official CPI is still very benign, on the ground inflation is rather high, especially for food and necessities. Rumors galore for upcoming major adjustments for subsidies on gasoline and natural gas. But given the performances of other sectors of the economy, hiking the interest rate now probably isn’t quite prudent either.