China’s non-manufacturing PMI falters: GDP growth to fall below 9%!

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China’s official non-manufacturing PMI surprised on the downside again. The CFLP non-manufacturing PMI dropped to 57.7 from 59.3 in September. Although the actual figure implies continued robust growth, it should be viewed in perspective. Until July the PMI matched the trend of previous years but became unstuck in August.

Sources: CFLP; Plexus Asset Management.

It is apparent that the PMI came in much lower than what the seasonal trend implied.

Sources: CFLP; Plexus Asset Management.

On my seasonally adjusted basis the PMI fell to 54.6 in October from 57.0 in September.

Sources: CFLP; Plexus Asset Management.

In the past the smoothed seasonally adjusted PMI has been an excellent indicator of the underlying consumer confidence in China. At this stage the PMI indicates that consumer confidence probably dropped in October and is likely to fall further in November.

Sources: CFLP; NBSC; Plexus Asset Management.

The relative weakness of China’s economy compared to 2009 and 2010 has been especially evident since July based on my GDP-weighted CFLP PMI (manufacturing and non-manufacturing PMIs combined). The economy is still somewhat stronger than in October 2008 when the great global financial crisis started.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The outlook for China’s GDP growth in the fourth quarter is grim as my seasonally adjusted GDP-weighted PMI indicates that growth on a year-ago basis is likely to fall below 9%. I estimate that growth will approximate 8.9% from 9.1% in the third quarter.  Growth in the first quarter next year is also likely to decline further to around 8.5%.

Sources: CFLP; Li & Fung; Dismal Scientist; Plexus Asset Management.

The outlook for the CFLP non-manufacturing PMI in November is not rosy at all. I expect the PMI to fall to between 50 and 51 as November is the second-worst month from a seasonal point of view. By implication I therefore expect the seasonally adjusted non-manufacturing PMI to drop to approximately 53.0 from 54.6 in October.

But how will the Chinese stock market react to such a steep drop in the manufacturing PMI? It is evident that in the past the CFLP non-manufacturing PMI had little bearing on China’s stock market.

Sources: CFLP; I-Net Bridge; Plexus Asset Management.

The CFLP manufacturing PMI is more closely watched by the market, which is currently anticipating an unchanged to slightly higher PMI in November.

Sources: CFLP; Li & Fung; I-Net Bridge; Plexus Asset Management.

Japan’s recovery from the twin disasters earlier this year will continue to impact on the health of China’s manufacturing sector.

Sources: CFLP; Li & Fung; Markit; Plexus Asset Management.

China’s manufacturing sector and therefore China’s stock market remain vulnerable to another global financial crisis such as in 2008/2009.

Sources: CFLP; Li & Fung; Plexus Asset Management.

To me the current level of China’s stock market is priced in line with the underlying economic fundamentals.

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