China’s Composite PMI sinks! Stimulus program to be announced soon?

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I am a few days late with this commentary as a result of a rather hectic schedule after my return from New York. But rather late than never …

My seasonally adjusted GDP-weighted composite CFLP PMI for China sank from 52.2 in October to 49.5 in November. This marks the first drop below 50 since the great financial crisis of 2008/2009 and it is the lowest since January 2009.

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

The slump in economic activity became apparent when the CFLP non-manufacturing PMI for November dropped by a massive eight points to 49.7 from 57.7 in October. The drop was in line with what I expected, though, as it followed the normal seasonal weakness in November. It was also evident that the non-manufacturing sector had been below the trends of previous years since the second quarter of this year.

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

On a seasonally adjusted basis the non-manufacturing PMI fell to 51.4 from 54.6 in October – the lowest level since February 2009.

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

The weak non-manufacturing PMI comes on top of the seasonally adjusted manufacturing PMI that fell to 48.3 from 50.6 in October.

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

It is evident that the significant weakness in the economy is due to a fall-off in domestic demand. Consumer confidence has dropped to levels similar to those during the great financial crisis in 2008/2009 and the uprisings in the MENA countries, which were followed by Japan’s twin disasters. The CFLP non-manufacturing PMI indicates to me that confidence fell even further in November.

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

The current three-month moving average of the seasonally adjusted composite PMI is 51.5 and is consistent with 8% GDP growth on a year-ago basis. If there is no improvement in the PMI over the next two months it will indicate that growth has fallen to approximately 7%.

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

That will mean China’s economic growth has fallen below the 8% threshold stated by Beijing to improve employment and incomes to maintain popular support.

I will not be surprised if China soon unveils an economic stimulus program aimed at boosting domestic demand in support of other Western governments, especially to kick-start the European economy. Again, as in 2008/2009, the fallout of a crisis has been worse than the PBoC anticipated. The measures are likely to be aimed at reviving business and consumer confidence. The plans are likely to mirror those of 2008/2009 and will probably include spending on housing, infrastructure, healthcare and social welfare. Tax deduction for capital spending by companies is likely to be included.

I think the first salvo was fired two weeks ago when the PBoC announced that the reserve requirement ratio of banks will be lowered by 50 basis points – for the first time in three years.

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