Chinese private sector manufacturing contracted for the seventh consecutive month: The HSBC Flash Purchasing Managers Index (the earliest indicator of China’s industrial activity) fell from a final reading of 49.3 in April to 48.7 in May.
The result was in line with consensus forecasts. Any reading below 50 indicates that the manufacturing sector is contracting. Across the sub-indices new exports orders contracted from 50.2 to 47.8 in May.
What does it all mean?
There have been concerns in the market that the Chinese slowdown was more pronounced than previously thought and the latest result is likely to add to the more bearish views on the Chinese economy – especially given the sharp contraction in Chinese new orders and exports.
Over the coming year China is forecast to be the biggest contributor to global growth and the current slowdown is certainly going to heighten the current levels of investor cautiousness.
Granted the HSBC flash reading does not reflect the larger manufacturing and state owned corporations and as such the focus is on small and medium enterprises which would have less access to credit. But what is clear is that manufacturing activity amongst the small to medium enterprises in China’s private sector contracted for the seventh consecutive month.
China is forecast to be the biggest contributor to global growth and the current slowdown is certainly going to add to the current levels of cautiousness being shown by investors. The slowdown in exports is a clear driver of the exacerbated level of weakness. And given that around a quarter of Chinese exports go to the European Union, the anticipated EU recession doesn’t bode well for near term export activity.
There is no doubt that Chinese manufacturers have been finding trading conditions difficult and activity levels have come off the boil in the last few months. But to some degree the data is backward looking. In recent months Chinese authorities have got inflation under control and given the benign inflation outlook it is likely that policy makers will turn on the stimulus tap in coming months.
Already measures have been taken with the Reserve Ratio being cut for the second time this year, in recent weeks. In addition China’s premier has called for further stimulus and in recent days news reports have confirmed that infrastructure projects are being fast tracked.
What are the implications for interest rates and investors?
Domestically the Reserve Bank would be concerned about the Chinese slowdown and ongoing turmoil in Europe. The array of negative news continues to be a dampener on domestic confidence and as such further rate cuts are likely. CommSec expects the next rate cut to take place in August, however the risks are that policymakers move earlier, if the debt crisis in Europe escalates.
