China’s manufacturing PMI continues to indicate economic contraction

Published on Author mcdonaldp16

A Purchasing Managers Index is an economic indicator generated monthly from surveys of private sector companies. A country’s PMI calculated by creating a weighted-average of the percentage of answers reporting improvements, no change, and deterioration. Panels reporting improvement for 100% of the questions asked would thus have PMIs of 100, and those reporting 100% deterioration would have PMIs of 0. Therefore, PMIs less than 50 indicate contraction with PMIs greater than 50 indicate expansion for a given month.

Today, the HSBC Purchasing Managers Index reported officially a PMI of 49.7 for January 2015, after December’s 49.6, the lowest in two and a half years. This will no doubt intensify speculation of China’s manufacturing industry. Not robust to this decelerated growth is the service industry; China’s non-manufacturing PMI fell from 54.1 in December to 53.7 in January 2014. In light of the recent housing bubble in China, financial services are dwindling as China slowly approaches its debt capacity, which, according to Peking University’s Michael Pettis, will be reached in three to four years.

why-chinas-2-pmi-numbers-are-going-in-different-directionsThe problems in the real estate market, however, are not similar to what the United States experienced in its recession. Almost all forms of debt are collateralized by property, which lenders hold on their balance sheets rather than selling them as securities in secondary markets. Nariman Behravesh, chief economist at IHS, affirms that there are far more internal than external factors that are slowing China’s economic growth. If China wishes to transition from an export-dependent to a consumer-driven economy, it will likely need to undergo further reform and stimulus from the central government as one-year interest rates have already begun to be cut by the central bank.

Sources: CNBC Story A and Story B and Business Insider for the graph.

One Response to China’s manufacturing PMI continues to indicate economic contraction

  1. “Contraction” or slowdown? I have not spent time looking at the PMI or other “diffusion” indices (this “better less worse” index structure is common), whether for China or Japan/the US so I’m not sure how to interpret this. However, I strongly suspect it means that manufacturers are seeing fewer orders than expected, so that is against base growth rather than implying an absolute decline. But I’m not sure.

    I’ve commented on other posts: is China an export-dependent economy? Look at the most recent World Bank or IMF overview of China (links on the blogroll at right!) to check relevant data.