Look out below folks. Coming hot on the heels of the alarming bank credit freeze of the past two weeks, a string of poor economic data from China has been topped off by the news that manufacturing is contracting or, at the very least, flatlining.
The official purchasing managers’ index (PMI) for June fell to 50.1, a fall from a read of 50.8 in the previous month and only just in “expansion” territory. There’s worse news in a survey financial markets value far more, because it is of private businesses and conducted by HSBC, a far more impartial actor that the Chinese government. That was 48.2 in June, down from 49.2 in May which the bank said signaled “a modest deterioration of business conditions”.
In further commentary it said operating conditions have now worsened for two successive months; output contracts fell for first time since last October and new export orders fell at the joint-fastest rate since March 2009. That was during the worse part of the global financial crisis and just before China’s November 2008 stimulus headlined at 4 trillion renmimbi but worth much, much more kicked in. The government has made it very clear that wont be happening again – and indeed that, plus the continuing global economic malaise, is the cause of what is happening now. That is what you get when everyone keeps kicking the can down the road.
Now the PMI is all but ignored during the good times, when inflation and credit growth become the biggest concern, when things are looking bad every 0.1 per cent movement is hung upon. That’s ridiculous give the nature of surveys, which it is based on but the trend is usually pretty reliable and it’s only going one way.
This time there is a load of other data to back it up and a government that right now is saying enough is enough when it comes to handing out money hand over fist, often to government owned businesses.
Investment banking research analysts are by the nature of the organisations they work for boosters, in general they over forecast economies such as China were there is lots of new business to be written. The Chinese government and its corporate pals don’t like naysayers, they might spoil the party. So they tend to follow, rather than pick the trends. Now I have no hard and fast empirical evidence on hand to point at, rather relying on what I have seen in two decades as a financial journalist.
That’s a slightly convoluted way of saying when you see analysts start to print things like there’s 30 per cent chance Chinese growth may dip below 7 per cent (as Nomura did today) its time to dust off the worry beads. They have been slow to pick this slowdown but now seem to be joining the growing chorus of gloom.
As much as we know a slowdown, in the long term, will be good for China if heavy renovations on its business model can be affected at the same time ( yes we have said this before) that won’t give much cheer to the Australian stock market and dollar which are now both tethered to China like never before.
China’s total quantum of demand will continue to rise but at a time when the supply of the commodities that make Australia rich – primarily coal and iron ore – is increasing. So much for the ill thought out mining tax and its successor. They were very much creations of Wayne Swan, one of the more average people to ever occupy the Treasurer’s chair. His successor Chris Bowen and his opposite number Joe Hockey, as well as their bosses Kevin Rudd and Tony Abbott need to come to the Australian people with a plan for how to overhaul our economy. Like China’s, it needs heavy renovation.
That should be what the Australian election is about.