What’s up with the Chinese economy?

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The GDP-weighted Composite CFLP PMI that I calculate for China rebounded strongly to 52.6 in December from 49.3 in November. Much of the rebound can be attributed to seasonal factors, though.

While November is normally a weak month from a seasonal point of view the recent extreme weakness is noteworthy and cast serious doubt on the health of the Chinese economy. The strong rebound in December’s seasonally-adjusted Composite PMI (my calculation) to 52.4 from 49.5 in November allayed some of my fears of a possible further deepening of the growth recession in China.

Much of the rebound in the Composite PMI can be attributed to a surge in the CFLP Non-manufacturing PMI to 56.0 from 49.7 in November.

After adjusting for seasonality the CFLP Non-manufacturing PMI jumped to 55.2 from an extremely weak 51.4 in November.

The slump in the seasonally-adjusted non-manufacturing PMI in November was an extension of the weakness that set in since March 2010. The slump in consumer confidence was probably the main driving factor behind the weakness in November.

The strong showing of the non-manufacturing PMI in December may indicate that consumer confidence improved somewhat in December, but with the seasonally-adjusted PMI only at October’s levels consumer confidence is likely to remain at historically low levels. On top of the Eurozone’s malaise, the slump in consumer confidence probably also had an impact on the unseasonal slump in the seasonally-adjusted CFLP Manufacturing PMI in November. That obviously affected Japan’s manufacturing sector too.

The seasonally-adjusted composite PMI for China indicates to me that year-on-year GDP growth has probably slumped to approximately 8% in the fourth quarter of 2010.

While consumer confidence in China may have rebounded somewhat in December it remains at crisis levels similar to that of 2008. Inventories at factory level are high relative to orders. In light of the situation in the Eurozone, I do not foresee any significant growth in new export orders for China’s manufactured goods. To keep the wheels of China’s industries rolling internal consumption needs to be boosted and consumer confidence restored. I believe that the first of many salvos of stimulatory measures have been fired to rekindle the economy. Recently the reserve requirements of Chinese banks have been lowered and yesterday the China Daily reported that “New measures will be introduced to boost consumption, especially for vehicles and electrical appliances, as export demand weakens. Ministry of Commerce spokesman Shen Danyang also said the ministry is mulling over launching new programs, expected to be announced next week, on expanding domestic consumption.”

The Chinese authorities have despite heavy criticism shown their mettle during the great 2008/2009 crisis by successfully pump-priming the economy and turning the economy long before any of the other major economies. But it is early days still.

Will China’s manufacturing sector continue the apparent recovery in January? I think that the manufacturing PMI will remain under pressure in January – not because of weakening economic fundamentals, though.  The impact of the preparations for the Chinese New Year celebrations that begin on January 23 and last until January 28 is significant. Chinese people may take weeks off from work to prepare for and celebrate the New Year. The celebrations last for a total of 15 days. In the past it had depressed the PMI of that month and I believe January will be no exception. Thereafter the manufacturing PMI is likely to be heavily boosted by pent-up demand and return to normality.

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