Mixed messages

Rival PMI data confuses on state of economy


13 Apr 2012
Week in China

Expanding or contracting? That’s the question being asked of the Chinese economy this month. And, confusingly, no one seems quite sure.

Contradictory data from two important purchasing managers’ indices that measure manufacturing and production have left economists puzzled.

One is put out by the Chinese government and the other by HSBC and Markit, a financial services information company based in
the UK.

The government’s PMI index for March showed a rise to 53.1, its strongest reading in a year, indicating economic expansion. Chinese media were quick to celebrate a fourth consecutive month of positive readings.

But HSBC’s index for the same month showed a drop to 48.3 on the previous month, suggesting a slowdown for the fifth month in succession. A score over 50 indicates economic expansion, while those below 50 indicate contraction.

Taken at face value, the indices suggest the economy is both expanding and contracting at the same time – a clear impossibility. One set of figures must be wrong. But which set?

The market has mostly taken HSBC’s index as the more reliable of the two, perhaps not surprisingly given the government’s track record with figures. As Li Keqiang once acidly commented, official figures on China’s economy are often “for reference only” – a fairly damning verdict from the man that’s almost certain to become the country’s next prime minister.

The government can only boost growth by easing monetary policy and pumping up infrastructure spending but there is no way to do that this year.

Other evidence for the bearish: the fact that the National Bureau of Statistics said state-owned companies saw their profits fall by 19.7% in the first two months of this year. That also indicates the official PMI may be too optimistic, with the profits data showing sluggish global economic conditions hurting Chinese companies, especially state-owned enterprises, Xinhua suggests.

Interestingly, the National Bureau of Statistics also reported that private companies’ profits grew 24.4% during the same period.

That adds to the confusion.

After all, the HSBC index is weighted more towards private companies while the government primarily measures
state-owned firms.

That would suggest that the two indices ought to have produced opposite results – HSBC’s a positive reading, the government’s a negative one.

Most analysts advise that the official figures should be treated with caution. Data between 2005 and 2010 shows the PMI
climbing at least three points each year in March from February, a trend normally attributed to factories gearing up production
when winter ends.

But that may not be representative of wider economic conditions. “It’s clear there’s a slowdown under way,” a Chinese auto industry executive told the Financial Times. “But whether that gets much worse or not depends on three things: Europe, the [domestic] real estate market and whether the government boosts infrastructure investment again.”

Few observers believe the government will let the economy experience a genuinely hard landing during a year of political transition.

Yet its policy options may be more restricted today than in the past.

“According to the Chinese economic model the government can only boost growth by easing monetary policy and pumping up infrastructure spending but there is no way to do that this year,” Yuan Gangming, an economist at Tsinghua University told
the FT. “All the bullets were spent a couple of years ago, infrastructure investment has already peaked and monetary policy is already loose.”

Inflation also remains a risk. Confounding most analyst expectations, it rose in March to 3.6% (year-on-year), with food inflation at an uncomfortably high 7.5%.

So the government faces its customary dilemma – does it boost investment once again and risk fuelling further price rises, or does it try to put a lid on prices with broader economic cooling and risk crimping growth?

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