Skepticism About China’s Slowing Growth

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The carefully followed HSBC measure of China’s purchasing manufacturing  index  showed flat activity in April. The number was the same as March at 51.8. The figure is below the longer term trend over the last year.

The reaction was expected. “April’s survey pointed to relatively lackluster growth of new business and a slower expansion in manufacturing production,” HSBC said. China’s effort to tighten its money supply must have worked and should continue to do so. What other reason could there be for the level and modest growth?

There are several other explanations and each is more ominous than a reaction to monetary policy.

US GDP growth was only 1.8% in the first quarter and much of the weakness was due to high energy prices. The second quarter could be worse if that is true. High fuel and gasoline prices only took hold part way through the first quarter. China’s PMI April number could be caused by the Japan disaster and its effect on demand in that country, a slow demand for consumer products in the US, and ongoing economic weakness in the UK and crippled EU economies. Therefore, China’s PMI growth deceleration could last a long time.

The other reason that PMI growth has become flat is due to flaws in China’s data gathering. Economists have criticized this for years. Chinese officials say they will refine and improve their ability to measure their economy. Very few experts think the effort is far along. The April number can only be seen as a realistic measure if it is confirmed by a figures which measure several consecutive months.

Any excitement or conclusions based on the April data are premature.

Douglas A. McIntyre