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July China PMI

08/01/2013

The government reading for Chinese manufacturing (Figure 1) was released last evening, coming in at 50.3 for July, ahead of both last month’s 50.1 and the consensus estimate of 49.9.

In recent weeks Chinese Premier Li Keqiang has made it clear his government will attempt to stimulate a struggling economy that is jeopardizing the 7.5% growth target outlined in March 2013. Investors should expect any stimulus efforts to come in the form of fiscal policy initiatives, not monetary policy.  Premier Li is hurrying the start of select infrastructure projects such as the central and western railway construction. Therefore, achieving a visible growth rebound will be more difficult and certainly slower than if monetary policy measures were implemented.

The better China PMI reading should have a mildly positive impact on global capital markets today. It may signal that the concern the Chinese economy is contracting much more than anticipated is misplaced. However, I caution investors not to use this report as reason to reallocate toward direct China-related assets plays, such as the materials sector.  Significant overcapacity still exists for raw materials in China.

U.S.-centric investments remain the favored strategy, and this report does little to impede their current appreciative path.

Let’s take a look at China PMI and its sub-indices year to date....

China PMI

July

June

May

April

March

February

January

PMI

50.3

50.1

50.8

50.6

50.9

50.1

50.4

Output

52.4

52.0

53.3

52.6

52.7

51.2

51.3

New Export Orders

49.0

47.7

49.4

48.6

50.9

47.3

48.5

New Orders

50.6

50.4

51.8

51.7

52.3

50.1

51.6

Imports

48.4

47.9

50.3

48.7

48.9

48.1

49.1

Input Prices

50.1

44.6

45.1

40.1

50.6

55.5

57.2

Employment

49.1

48.7

48.8

49.0

49.8

47.6

47.8

Raw Material Inventory

47.6

47.4

47.6

47.5

47.5

49.5

50.1

Source: Bloomberg

Figure 1: China PMI, July 2012 to July 2013
terranova 8-1 1.1
Source: Bloomberg

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