Thu 5 Mar 2009
China – better days ahead?
Posted by Prieur du Plessis under Economy, Investment, Markets, Money
China’s manufacturing Purchasing Managers’ Index (PMI) strengthened for a third consecutive month in February, climbing to 49.0% from 45.3% the previous month. Li & Fung Research Centre reports that there were some encouraging signs: all sub-indices were higher than their respective levels in the previous month though many were still lower than the critical level of 50% (i.e. still contracting).
In particular, both the Output Index and the New Orders Index rebounded to the expansionary zone of higher than 50% for the first time since September last year. In addition, the New Export Orders Index grew strongly by 9.7 percentage points to 43.4% in February, compared to the previous month.
The improved PMI numbers, together with the government’s additional stimulus package, probably mark a trough in the GDP growth cycle. Andrew Pyle of ScotiaMcLeod, as reported by CEP News said: “Estimates for the country’s growth outlook in 2009 have also started to levitate from the alarming 5-6% suggestions earlier this year back to 8%. Not as lofty as what we have been used to, but firm enough to put a floor under commodity prices …”
Some of the recent headlines from China Economic Net give an indication of the Beijing’s strong emphasis on boosting growth.
NDRC: Further shut down backward production facilities [03-05-2009]
NDRC: China’s outbound investment up 13.2% [03-05-2009]
China to further reform power pricing system [03-05-2009]
China to put more funds to support SMEs [03-05-2009]
China aims for 20% growth in fixed asset investment in 09 [03-05-2009]
China to invest 716.1b yuan in agriculture [03-05-2009]
China aims 1.58% of 2009 GDP in research and development [03-05-2009]
China stresses domestic demand in stimulating growth [03-05-2009]
China aims for 17% growth in money supply in 09 [03-05-2009]
China pledges 42b yuan employment support [03-05-2009]
China pledges hefty investment to boost agriculture [03-05-2009]
China budgets record-high fiscal deficit [03-05-2009]
Wen urges efforts to promote export [03-05-2009]
China to continue active fiscal policy for growth [03-05-2009]
New body planned to run underperforming SOEs [03-05-2009]
Official: Spend more to boost economy [03-05-2009]
Let’s focus on a few graphs in order to gain a better understanding of China’s economic situation.
First up is the relationship between China’s PMI for new orders and the Baltic Dry Index - measuring freight rates of iron ore and bulk goods - showing both indices turning up from last year’s lows.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Next, China’s PMI for stocks of major inputs shows the deterioration has probably bottomed and, based on the close relationship with the Metals Index, should put a floor under commodity prices.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Source: Plexus Asset Management (based on data from I-Net Bridge)
And finally, China’s improving PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)
Source: Plexus Asset Management (based on data from I-Net Bridge)
The Chinese Shanghai Composite Index is still down 63.9% from its high of October 2007, but has recovered strongly since its November 4 low (+27.8%) and is also the top performer for the year to date (+20.7%). As mentioned before, the chart pattern of the Index shows arguably one of the most bullish formations of the major stock market indices (see graph below).
The chart (top section) shows a pattern of rising lows, supported by the four-month trend line and the 50-day moving average, with the 200-day moving average within sight. Also, Chinese stocks have outperformed the Dow Jones World Index by 87% over the past six months (see rising relative price-performance line in bottom section of chart) and the S&P 500 Index by a similar magnitude (not shown).
The Chinese believe good and bad follow each other closely. It is therefore also comforting to learn that the Year of the Ox is a sign of prosperity and has been very rewarding in the history of China. Will China’s command economy come to the Western world’s rescue? Time will tell, but there are rays of light, not least of which is a bullish-looking Chinese stock market.
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Pingback from The future is bright for China
March 5th, 2009 at 6:06 pm[...] The future is bright for China China’s manufacturing Purchasing Managers’ Index (PMI) strengthened for a third consecutive month in February, climbing to 49.0% from 45.3% the previous month. Li & Fung Research Centre reports that there were some encouraging signs: all sub-indices were higher than their respective levels in the previous month though many were still lower than the critical level of 50% (i.e. still contracting). In particular, both the Output Index and the New Orders Index rebounded to the expansionary zone of higher than 50% for the first time since September last year. In addition, the New Export Orders Index grew strongly by 9.7 percentage points to 43.4% in February, compared to the previous month. [...]
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Pingback from China – better days ahead? | The Big Picture
March 5th, 2009 at 6:38 pm[...] China – better days ahead? [...]
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Pingback from MortgageNewsClips: Co-Ops and Reverses, Geithner Warns, BCG on Cuts, Assistance Examples, Chinese Charts, State Prices and Map, Mary Schapiro, 2% Abuse Ahead?, Vacancy Rates, REO Rentals, Scam Primer, PennyMac, MTM Madness, 24 Videos, Introducing HENRYs
March 7th, 2009 at 5:03 pm[...] 1. lots of charts - China – better days ahead? - Posted by Prieur du Plessis - The improved Chinese PMI numbers, together with the additional stimulus package, probably mark a trough in the GDP growth cycle. Will the Chinese command economy come to the rescue of the Western world? Time will tell, but there are rays of light, not least of which is a bullish-looking Chinese stock market. - Investment Postcards from Cape Town [...]
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Pingback from Words from the Investment Wise: March 8 2009 | The Big Picture
March 8th, 2009 at 2:35 pm[...] in February, climbing to 49.0% from 45.3% the previous month. As discussed in a recent post (”China - better days ahead“) and as shown in the graph below, China’s improving PMI seems to indicate that the [...]
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Pingback from MortgageNewsClips: Co-Ops and Reverses, Geithner Warns, BCG on Cuts, Assistance Examples, Chinese Charts, State Prices and Map, Mary Schapiro, 2% Abuse Ahead?, Vacancy Rates, REO Rentals, Scam Primer, PennyMac, MTM Madness, 24 Videos, Introducing HENRYs |
March 9th, 2009 at 3:57 am[...] 1. lots of charts - China – better days ahead? - Posted by Prieur du Plessis - The improved Chinese PMI numbers, together with the additional stimulus package, probably mark a trough in the GDP growth cycle. Will the Chinese command economy come to the rescue of the Western world? Time will tell, but there are rays of light, not least of which is a bullish-looking Chinese stock market. - Investment Postcards from Cape Town [...]
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March 5th, 2009 at 2:35 pm
Not to say they aren’t trying, but our sources in CHina suggest much of the lending increase recently seen simply went into A shares. Perhaps the stock market is not telling the whole truth about the economy yet?
March 5th, 2009 at 3:14 pm
You might also want to look into the inventory build up in ports as I read that was also happening.
March 5th, 2009 at 3:51 pm
Frankly I don’t think chinese numbers are very useful. I have often wondered whether forecasters are forecasting how the chinese economy will go or what figures the government will publish. Given that the government has stated on many occasions that it believes it will meet its ambitious target of 8pct. growth, there is no prospect whatsoever that they will report a number lower than this, even if the economy collapses 30 pct.
Whether the economy has really grown 8 percent no one will ever no, including the chinese government.
March 5th, 2009 at 4:02 pm
rmf: We have done a considerable amount of number crunching in an attempt to arrive at Chinese growth numbers other than to simply take the published figures on face value. Using variables that are outside the direct “control” of Beijing, our computed growth stats were not vastly different from the government’s numbers.
March 5th, 2009 at 8:51 pm
One the the world needs to understand that China will work hard to save itself. That doesn’t necessarily mean it will save the rest of the world — read that all the projects from the fiscal stimulus will go to Chinese companies etc.
Second if you combine the private consumption expenditure of Chindia, it is much lower than the US consumer. Add European and it is expecting a lot that China will save the Anglo Saxon world.
March 6th, 2009 at 5:28 pm
Nice work! One of the simpler notions about the China stimulus, is the sheer size of the package. At $25-billion+ per month for two years of expenditure in infrastructure, re-construction, agriculture, this package has no precedent. And it is not being used to fill potholes or repay debt; these stimulus funds are being utilized for new projects and enlarging pre-existing ones like the ongoing three gorges dam.
China, with its low consumer, corporate, and government indebtedness, high national savings rate, and command capitalism, is in a most enviable position to lead a global recovery.
Thank you for your valuable analysis.