05/10/2015 - 16:25

China economy runs at two speeds

05/10/2015 - 16:25


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MIXED: Manufacturing in China slipped slightly in September. Photo:iStockphoto

Manufacturing in China contracted in September, although the performance was better than in August and surpassed forecasts.

The purchasing manager’s index, which is collated by the Chinese National Bureau of Statistics, was up 0.1 points to 49.8 for the month of September.

A score below 50 means the sector is in contraction, although an improvement in the index means the magnitude of the contraction has abated since August.

The index takes into account inventory levels, employment, deliveries, new orders and production to give a leading indicator of the performance of the sector.

The result is still lower than July, however, when the index was around 50, and May/June, when it was at 50.2.

By comparison, the services industry PMI held up well, coming in at 53.4, the same level as August.

That means that the labour-intensive services part of the economy is still growing strongly, although it represents a smaller section of Chinese GDP than it does in Australia.

The manufacturing result was well above expectations, nonetheless.

In late September, Markit published a flash PMI reading suggesting the index was as low as 47.

At that level, the result would have been the worst since the global financial crisis.

There is some intrigue about the divergence, however, with the bank that released the figures in conjunction with Markit, HSBC, ending that relationship after the figures came in significantly more pessimistically than official numbers for most of the year.


HSBC chief China economist Qu Hongbin said in September that manufacturing had been affected by China’s trading position.

“New export orders again appear to have been the biggest contributor the decline,” he said.

“(The flash) data points to headwind to growth as a result of weak global demand.

“There have been some signs of cyclical recovery in the property market and better access to funding for infrastructure projects in recent months.

“More monetary and fiscal policy measures are also on the cards.”

In a separate note for investors, Mr Hongbin said that monetary conditions in China had reached a six-month high in August

“The improvement was led by a smaller drag from the real effective exchange rate and a fall in the real interest rate,’ he said.

“The latest reading indicates that monetary conditions in China have continued to improve on the back of cumulative policy easing measures.

“But more easing measures are still warranted.”

One thing that might encourage the use of expansionary policy is recent inflation data.

Price increases seem to have abated, according to the bureau, although there is some suggestion it could begin to reheat.

“In August, the consumer price index went up by 2 per cent year-on-year,” the bureau said.

“Prices grew by 2 per cent in cities and 1.8 per cent in rural areas.

“Food prices went up by 3.7 per cent (while) non-food prices increased 1.1 per cent.”

The month-on-month increase was 0.5 per cent, however.

CommSec economist Savanth Sebastian said easing Chinese growth and weaker commodity prices had weighed on investor sentiment in Australia.

“(However), the Chinese economy should continue to expand by 6-7 per cent, with solid volume growth expected for commodities, he said.

“Looking ahead, the Australian economy is expected to lift over the coming year, underpinned by low interest rates and record home construction.

“The lower Aussie dollar will also provide a boost for local businesses.”

HSBC economist Paul Bloxham gave a similar analysis.

“Australia is the lowest-cost producer for many commodities, so in many cases demand for the Australian products has continued despite weaker global demand,” he said.

“For example, Australia’s iron ore export volumes to China have been rising (up 8 per cent year on year), (even) as China cuts back on its own higher cost domestic iron ore production (down 8 per cent year on year).”

Minimal economic data is due out of China in the coming week, as the country is on holiday for the Golden Week.


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