TOO MUCH IRON IN THE FIRE AS CHINESE DRAGON COOLS DOWN
By Ruma Dubey
The PMI data for China, for February came in much lower than January- a seven-month low of 48.3 in February from January's final reading of 49.5. A reading below 50 indicates a contraction while one above shows expansion and for two consecutive months, China’s PMI reading has been coming below 50.
And this is not just from HSBC. The China Federation of Logistics and Purchasing (CFLP) which compiles the index on behalf of the National Bureau of Statistics, in January stated that China's official PMI edged down to 50.5 in January from December's 51,its lowest reading since February 2009. China's factories saw fewer export orders and slacker growth in new orders last month. A sub-index for new orders fell to a six-month low of 50.9, and export orders slipped to 49.3, also a six-month low. The employment sub-index fell to an 11-month low of 48.2. The official PMI for Feb is expected to be released at the end of month; so before the end of the weekend, on 28th, along with India’s Q4 GDP numbers, we will have a lot of data to munch on.
First things first – what exactly is this PMI? This is a relatively new concept and we have been seeing HSBC putting up India’s PMI numbers also every month. This PMI, like the IIP reflects the economic health of the manufacturing sector. It has five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. As the name indicates, it reflects the purchasing power of the managers, which in turn gives a peek into the demand. So a rise in PMI means demand is up for goods and services and vice versa.
What does this mean? Is China slowing down or more importantly, can the world afford to have a slowing Chinese economy when it is on the verge of recovery? Analysts in China are of the opinion, not surprisingly, that this slowdown is just a ‘seasonal’ factor. Europe is China’s biggest market and when that entire region is sluggish, naturally, China is taking some hit. More importantly, a lot of systemic changes are being initiated in the Chinese economy, shifting from a purely export driven economy to spurring domestic demand through the Third Plenum like reforms in financial sector, insurance, housing, privatization of the banking sector. Thus it is shifting to a more market driven economy and this shift is causing this pain and slowdown. Seasonally too, Q1 is always slow for China, given the long holidays for the Chinese new year celebrations. Despite the jitters now, majority of the analysts are confident that Beijing will jump in to rescue the economy if it looks on the verge on a slump. The general consensus is that China can sustain its 2014 economic growth broadly in line with last year's 7.5% target.
There are many who question the veracity of the Chinese economic data. With so much control over all information, doubts are raised time and again about the information itself being meted out. Transparency is a bad word in China and human resource simply means hands which produce goods. Despite all this, China continues to draw one and all like a magnet. Everyone worth their name in salt has set up shop in China or has outsourced manufacturing to China. Every single piece of data which comes out is dissected and debated and usually, makes it to the front page of every business newspaper around the world. Is it the draw of its US$3.3 trillion forex reserve, the sheer panache with which it delivered the Beijing Olympics or its infrastructure wonders like Three Gorges Dam, the world's highest railway line to Lhasa, the Beijing-Shanghai high-speed rail link; the list is endless. Did you know that five of the world's top 10 contractors, in terms of revenue, are now Chinese?
Thus if we look at this logically, we cannot ignore China as it looms large over the globe today simply because it so humungous; towering like the Mt. Everest. Like mountaineers vying to climb the Everest, with unpredictability threatening at every step despite years of experience, China too is an enigma. No one, not even the best brains at Goldman or Moody’s or GE or Apple, are able to lay a finger on the exact working of its development model. Forming alliances with some of the most dangerous and authoritarian countries in the world, while signing the dotted lines with developed countries, one cannot really fathom what really lies beneath.
Coming to the basic question – can the world today cope with a slowdown in China? Well, it will hurt; there is no beating around the bush there. If the fastest growing economy slows down, which are like wheels of an automobile, naturally, if one or two wheels develop a puncture, slowdown is certain. A few years ago, one could have never ever imagined China becoming what it is today. But that is how the changed equation of the global economies stands today.
Seen the disaster movie ‘2012’ where the world comes to an end? That movie to a large extent depicts the global scenario – it was an Indian scientist at NASA who predicts the end of the world but it is China which is assigned the task by USA to build a huge structure which will withstand the disaster and thus save a few human beings after the entire earth is destroyed. One can shrug this off as movie fiction but it is the perception which is a learning. Thus that’s the way things stand – India can be the grey cells to the world but it will neither earn enough moolah nor will it help save the world. But it is China which the rest of the world thinks is capable enough to build infrastructure of mammoth proportions. Huge and strong enough to save the world. “Made in China” anyone?