Economies: Is China Slowing, Or Growing?

Just as we had mixed news from the Japanese and Australian economies on Tuesday, yesterday we got the same story from China with two surveys of the country's manufacturing sector producing very different results.

The official purchasing managers' index rose to 50.5 in January from 50.3 in December (a reading above 50 indicates expansion, below 50 indicates contracting levels of activity).

The reading confounded forecasts for a decline to 49.5%.

But that came in the private survey from HSBC/Markit which showed a final reading for January of 48.8, unchanged from the preliminary reading released last week and slightly higher than the December outcome of 48.7.

Similar surveys for South Korea and Taiwan saw another month of contraction in January, but not as steep as seen in December, while South Korea saw its first trade deficit for more than a year as exports fell 6.6% last month.

And the PMI for India showed a sharper than expected improvement.

In fact India's manufacturing sector grew at its fastest pace in eight months as factory output surged the most on record.

The HSBC/Markit manufacturing PMI jumped to 57.5 from 54.2 in December. It belied the weakening state of growth in the wider Indian economy in recent months.

The factory output sub-index in the PMI rose to 62.9 in January from 55.8 in December, the biggest rise from one month to the next on record. Both the output and the new orders indexes rose to their highest level since May last year.

In Australia, the PMI showed a sharp improvement, which also stood out compared to the rest of the region.

In China the official survey came from the China Federation of Logistics & Purchasing survey, and an analyst with that group Zhang Liqun was quoted as saying, "The Chinese economy has gradually stabilised. The rise in new orders and raw material inventories reflects a recovery for industrial companies".

The HSBC survey looks at small and medium-sized companies, while the official PMI, from the Federation is weighted more towards large, state-owned enterprises.

Economists also cautioned against over-interpreting the data because of seasonal distortions caused by the Chinese New Year in the final week of last month.

That saw much of Chinese industry and business closed or run at lower capacity.

HSBC's commentary on its PMI was downbeat, saying that the January data showed deterioration in output and new business from month-earlier levels.

In addition, companies were inclined to draw down inventories amid efforts to rein in spending, while they were also cutting workers, extending a trend to trim payrolls that had been seen in preceding months, HSBC said.

HSBC economist Hongbin Qu said its PMI was out of tune with the uptick in industrial production seen in December, bolstering the view companies had speeded up production ahead of the Chinese New Year holidays, rather than in response to improvements in underlying demand.

"This calls for more aggressive easing measures to support growth, given that inflation is no longer a concern," HSBC's Qu said in a statement accompanying the PMI.

In a report published on Wednesday, Ernst & Young forecast that the Chinese economy would grow 8.1% in 2012, lower than the 9.2% for 2011.

But it also forecast a rebound to more than 9% growth in 2013, which is at odds with forecasts from the likes of the World Bank and the IMF which both see Chinese growth remaining under 9% next year.

"We would expect to see a significant shift in monetary policy and fiscal policy if growth were to slow significantly," E&Y said in its report.

South Korea suffered a drop in exports for the first time since 2009 in January, and its first trade deficit since January 2010.

According to figures from the country's central bank, Korean exports fell 6.6% in January compared to a year earlier, while imports rose 3.6%, sending the trade account to a deficit of $US1.96 billion, nearly $US5 billion worse than the surplus of $US2.9 billion in January of last year.

HSBC economist Ronald Man said in comments on Marketwatch.com that the data, along with soft inflation numbers, meant the central bank would likely cut the policy interest rate by a quarter point by the end of March. "Sure, there may have been distortions from the Lunar New Year. However, this alone is difficult to justify the swing to an outright contraction," he said.

Elsewhere in Asia, HSBC PMIs for Taiwan and South Korea, released yesterday also showed manufacturing continuing to contract in both countries in January, though less severely than in December.

HSBC's PMI for Taiwan was in at 48.9, versus December's 47.1. For South Korea, the HSBC measure was at 49.2 in January, up from 46.4 in December.

In Australia, the news from manufacturing was much more definitive with the strongest reading for some months in January.

The Australian Industry Group - PwC Australian performance of manufacturing index rose 1.4 points to 51.6 last month, thanks to a rise in the delivery of inputs and a rise in inventories of finished goods.

"The growth was underpinned by expansion in key sub-sectors such as food & beverages and transport equipment," Australian Industry Group Chief Executive Heather Ridout said in a statement.

"Respondents cited ongoing global economic uncertainty and strong overseas competition as factors inhibiting growth in January," she added.