• Thu
  • Dec 25, 2014
  • Updated: 6:24pm

Economic data from China and Europe raises concern

PUBLISHED : Thursday, 20 February, 2014, 10:28am
UPDATED : Friday, 21 February, 2014, 4:32am

Downbeat surveys of economic activity in China and parts of Europe highlighted the fragility of the global recovery and raised concerns about the withdrawal of monetary stimulus.

A contraction in Chinese manufacturing set the gloomy tone, which was reinforced by data showing an unexpected stall in activity across the euro zone.

The preliminary China purchasing managers' index from HSBC/Markit for February came in at a seven-month low, falling deeper into contraction territory. The gauge slid to 48.3 from 49.5 in January.

In Europe, the factory gauge for the region unexpectedly slipped to 53 from 54 in January, while the services measure rose less than estimated to 51.7 from 51.6, Markit Economics said yesterday. A composite gauge fell to 52.7 from 52.9.

But the US data provided a surprise as the Markit Economics preliminary index of US manufacturing increased to 56.7 in February from a final reading of 53.7 last month, the London-based group said.

"The macro data is starting to be not as good as before and some red lights are appearing in our model," Johann Nouveau, partner at Seven Capital Management, a hedge fund that uses mathematical models that gauge economic data and market momentum.

"We're still long stock markets but we're decreasing our exposure as the probability of a sharp drop is increasing."

Linus Yip, a strategist at First Shanghai Securities, said: "You have to expect Beijing to act if the economy slows down more from here because they cannot proceed with their reform agenda without maintaining a certain level of growth."

The data from the world's second-largest oil consumer dragged Brent crude below US$110 a barrel.

Markit's composite PMI for the euro zone dipped in February, although it held just below January's 31-month high. The service sector in France shrank at its fastest pace in nine months.

"The outcome was much weaker than expected and it clearly shows how business sentiment is failing to gain momentum as headwinds to growth are still well alive," Annalisa Piazza, market economist at Newedge Strategy, said of the French data.

The dollar was still firm against other currencies after the Federal Reserve's latest policy meeting showed it would keep trimming asset purchases.


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China can learn from Britain’s experience.
Britain’s former Chancellor of the Exchequer, Gordon Brown, made the mistake of division of bank supervision (by the Financial Services Authority (FSA) ) from monetary policy (by the Bank of England (BOE)).
But during the last crisis the FSA failed to make Northern Rock’s liquidity problems known to the BOE, thereby causing a run on a bank for the first time in Britain since the 19th century.
The British reputation for good economic policy was justifiably dented.
(From ‘China and America, A Time of Reckoning’)
Beijing might have to further regulate the financial sector by creating a super-regulator that would combine People’s Bank of China (PBOC), China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), and China Insurance Regulatory Commission (CIRC).
In particular, the separation of PBOC and CBRC may be politically correct but is possibly economically inconvenient.
PBOC sets the all-important loan-to-capital ratio and controls liquidity, among others.
CBRC is responsible for supervising the banking sector, including shadow banking.
What if their objectives are not consistent with each other --- say, PBOC wants a relatively tight credit market but the shadow banking sector is constantly being fed by money raised both inside and outside the country (Ponzi scheme according to Xiao Gang)?
According to the impossible trinity of a fixed exchange rate, free capital movement and an independent monetary policy, China should be able to have her own independent monetary and exchange rate policies, under strict capital control.
But the leakage of the dam of capital control seems to have diminished somwhat China’s ability to flexibly adjust her interest and exchange rates to her own advantage.
Also, to me it’s always interesting to observe the level of yuan deposits here in Hong Kong, if the yuan stops to revalue or even devalue against the US dollar, ceteris paribus of course.
The unhedged RQFII investments in yuan products may be less profitable than before.
Afterall the persistent-one-way-bet contradicts the no-free-lunch postulate.
The decreasing new orders and production at Chinese factories seem to be at odds with the relative recovery of the economies in the West, particularly that of the US.
So, either the West hasn't fully recovered yet, or China's domestic consumption is still weak, or
the triple whammy of rising wage rates, cannot-obtain-loans-even-at-high-borrowing-rates, and perhaps-overvalued yuan exchange rate is still hurting China’s SMEs (and SOEs).
Some smart money seems to be leaving China recently, as reflected by the lower yuan/dollar exchange rate in recent days, perhaps in anticipation of China’s coming weaker economy.
Perhaps the Chinese authority should now stop revaluing or even start devaluing the yuan to maintain a stronger external demand, in order to help alleviate the effects of lower investment expenditure and still-to-catch-up domestic consumption expenditure on China’s GDP growth rate, especially considering the observations that the US consumers become more confident now and resume their borrowing behavior and the US may start raising the interest rate earlier than expected.
But this may also cause a short-term capital flight out of China and hence even higher interest rates in China's shadow banking market.


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