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China PMI

12/03/2012

Late Friday evening, November 30, the National Bureau of Statistics reported the China Purchasing Managers’ Index (PMI) (Figure 1.1) for November at 50.6. That figure is better than last month’s 50.2, although slightly below the consensus estimate of 50.8.  November’s 50.6 print is the highest reading since the 53.3 reported on April 30 for April’s activity. The internals of the Index have both favorable and unfavorable components.
 
Favorable Components
 
•  New Orders rose from 50.4 to 51.2
•  New Export Orders rose back above 50 for the first time in six months, to 50.2, higher than October’s 49.3
 
Unfavorable Components
 
•  Imports remained below 50 at 48.5, up slightly from last month’s 48.4
•  Employment fell from 49.2 to 48.7 in November
•  Input Prices fell from 54.3 to 50.1 in November
 
The near-term impact from the report is somewhat muted. I do not expect an interest rate cut before year’s end. However, as Xi Jinping’s administration has now assumed leadership control, a token reserve requirement ratio (RRR) cut could be offered. Either way, investors should continue to view China’s monetary and fiscal policies as highly accommodative. I expect the trough for China growth (Figure 1.2) was established with Q3’s 7.4% reading. Q4 should gravitate back toward 7.7%.
 
Most important to investors is the continued strength of the Chinese yuan, (Figure 1.3) which traded 6.2105 on Friday, its highest level since 1994.  A strong currency and a burgeoning surplus are not signs of impending doom. In fact, I expect the clock has run out on the China “hard landing” crowd and that a reacceleration in growth is imminent.
 
Figure 1.1 China PMI 2012

Source: Bloomberg
 
Figure 1.2 China GDP 1998- Present

Source:  Bloomberg
 
Figure 1.3 Chinese Yuan 2012

Source: Bloomberg

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