• Fri
  • Dec 26, 2014
  • Updated: 11:28pm

Property market cool-down drives HSBC China services PMI to lowest level ever

Mainland services PMI from HSBC/Markit falls to near 9-year low last month, reflecting strains in key sector and keeping spotlight on stimulus

PUBLISHED : Tuesday, 05 August, 2014, 10:09am
UPDATED : Wednesday, 06 August, 2014, 2:54am

Growth in the mainland's services sector slowed sharply last month to its lowest level in nearly nine years, a private-sector survey showed yesterday, indicating a recovery in the broader economy is still fragile and may need further government support.

Weakness in new orders was also seen in an official services report at the weekend, which showed activity slipped to a six-month low. Both surveys contrast with other data in recent weeks that showed the economy was regaining momentum thanks to stimulus measures.

The weaker readings in services, which account for about 45 per cent of gross domestic product, raise the question of whether Beijing needs to do more to support growth, particularly in the rapidly cooling property sector.

The services purchasing managers index compiled by HSBC/Markit fell to 50 from a 15-month high of 53.1 in June. The latest reading is the lowest since November 2005, when data collection began. The survey indicated a stagnation of service activity last month, as a reading above 50 in PMI surveys indicates an expansion in activity, while one below the threshold points to a contraction.

In a sign that economic uncertainty has made companies more reluctant to spend, a sub-index measuring new business growth hit a 68-month low of 50.3 in July. Stock markets in Hong Kong and Shanghai turned negative after the survey was released, while most other Asian markets extended modest early losses.

The unexpected weakness in services comes after two separate PMI surveys last week showed China's factory sector posted its strongest growth in at least 18 months in July, adding to hopes that the economy was building up steam again after a weak start to the year.

"The weakness in the headline number likely reflects the impact of the ongoing property slowdown in many cities as property-related activity, such as agencies and residential services, see less business," said HSBC's chief China economist, Qu Hongbin.

A similar survey by the National Bureau of Statistics found non-manufacturing activity slowed to 54.2 in July from 55 in June as new orders rose at their weakest rate in at least a year. The official PMI is weighted more towards large, state-owned firms.

The extent and breadth of the property downturn have surprised analysts. At least 23 regional governments, which earn a large chunk of their revenues by selling state land, have openly or quietly relaxed home purchase restrictions this year, according to data from Cric, a unit of real estate services firm E-House China.

Yet despite the weakness in the services PMI, firms surveyed indicated they increased their staff numbers moderately in the past month to meet planned company expansions, HSBC/Markit said.


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Perhaps the latest drop in the official and the HSBC/Markit services PMI is reflecting China’s cooling property market, in which the ‘irrational exuberance’, according to Robert Schiller, has already discounted the future 100 years of an ordinary worker's total incomes into the market price of an ordinary private flat in Shanghai.
Unlike their counterpart in the foreign country, a private flat in China should command a relatively higher price because the use rights of the land in China is as long as 70 years, and the country can further grow at a relatively high rate in the coming decades.
Still, 70 years is much shorter than 100 years.
It's said that, in sharp contrast to the situation in Hong Kong, a residential building in China on average just lasts for 30 to 40 years, due perhaps to their different methods of house construction.
After that, the whole building will be demolished and rebuilt once again.
If this is the case, the irrational exuberance is even more serious than we originally think.
If something can’t go on forever, it won’t.
Not even China can be the exception.
((Chinese readers: ****wallstreetcn.com/node/59830)
China's present exports tax rebates should gradually be eliminated.
While these taxes could support the country's employment level in the exports sector, they also discourage the subsidized exports industries from upgrading their technologies and becoming more competitive in the world markets, and are subsidizing the foreigners (some of them keep on shorting the country).
The taxes also contribute to the country's surplus trade balances year-in and year-out, increasing difficulty of internationalising the yuan, the persistent rise in the country's foreign exchange reserves, the increase in funds outstanding for foreign exchange and the domestic money supply, the keep-on-rising domestic property market, higher land and rent prices, higher costs of manufacturing and service industries, higher (minimum) labour wages in the cities, higher cost of living in the first- and second-tier cities, shortage of low-cost labour in the above cities, surplus of labour in the villages, lower average income of the farmers, widening gap between the cities and the villages, delayed rebalancing of the country's economy, persistent reliance on the investment (and exports) sector to prop up the domestic aggregate demand, borrowing of money by the local governments at all costs in the shadow banking markets, growing bad debts, more unhealthy banking balance sheets, sleeping stock market, crowding-out of useful private investments, growing public sector and contracting private sector, ......
Wow, you have a lot to say.
To sustain the country's export competitiveness, China should lower the cost of running businesses in the country, in the form of lower land price and rent, lower (minimum) wages and taxes, lower cost of capital, less overvalued exchange rate, less red tapes and restrictions, and so on, rather than continuing the policy of giving exports tax rebates to the companies.
Neither should China upgrade too quickly her industries in the eastern parts of the country because she still has lots of untrained surplus workers waiting to be employed.
The following article shows that a less-developed country's successful high-growth-rate phenomenon may simply be related to the convenience of relocating the labour-intensive industries from the more-developed countries to that country, but not to her own special institutional, religious, social and other characteristics.
If the business environment in China becomes more and more costly, the foreign enterprises will simply relocate their China's companies to other lower-cost countries and never come back, rather than moving to the inconvenient western part of the country.
Not even the high-speed trains can greatly lower the cost of running a factory in the remote part of the country.
If so, China may then become the next Japan, experiencing one or two lost decades, after having lost most of her labour-intensive industries to the other lower-cost countries.
(Chinese readers: ****blog.caijing.com.cn/expert_article-151319-72683.shtml)
If the rural-land reform has to be delayed then, to enrich the farmers, the country’s import tariffs on agricultural products should be raised, and the prices of agricultural and food products in the country have to be increased by a large extent.
Of course, the above is done not to increase the country’s inflation rate, which is still relatively low nowadays.
Doing so means there will be a redistribution of income from the city dwellers back to the rural farmers, thereby narrowing the income gap between these two groups of people.
Right now, agriculture’s low profit rates has led to the retreat of large amount of resources from this industry.
Raising the prices of agricultural products means increasing the profit rates of this industry.
More capital resources will flow back to the farms, their outputs will prop up, and most of the surplus labour in the villages will be absorbed once again by the booming industry.
A rise in the income level of the farmers, occupying a majority of the country’s population, will increase the internal aggregate demand, and save most of the domestic industries by alleviating their present problems of excess capacities and rising bad debts.
Higher food prices will also boost the profits of the food industry, thereby discouraging the Chinese (and even foreign) food producers from producing a great amount of shoddy and fake food products in the domestic markets.
(Chinese readers:****blog.sina.com.cn/s/blog_63cdf73a0102uyo7.html?tj=fina)
In doing so, ceteris paribus, the city dwellers will be hurt as a result because now they have to spend more on food than before.
Well, income can be reallocated once again from the government to the city residents through lowering of various type of taxes and fees that have to be paid by them.
Also, part of the profits earned by the country's SOEs could be collected by the central government and reallocated to the present pension funds of the city residents.
The pension funds of the rural villagers can also be subsidized by the SOEs.
This way, almost all the consumers in China, now with a much more secure future, will tend to increase their consumption expenditures in the domestic economy, assuming that the capital control is still intact, and help rebalance the country's economy away from exports.
It seems that, right now, the central government's fiscal policies and transfer payments to the private sector are as important as the PBOC's expansionary monetary policies in solving some of the country's economic problems.
And the former is much more targeted and less inflationary than the latter.
What's even more important is to further improve the country's stock IPOs.
The stock market's fund-raising ability is able to allocate the country's excess savings to the highest-valued uses, is highly targeted, does not further increase the company's leverage, is not inflationary, and has no maturity mismatch issue.
More efforts must be made to streamline the IPO process.
Thanks to the local (and central) governments' implicit backup and hence the rigid demand for funds by the local governments and the SOEs at all costs, at the expense of the much more efficient and innovative SMEs and SMiEs, the LM curve in the IS-LM model is extremely flat for China at present, or even horizontal (a liquidity trap), making any expansionary monetary policies on the part of the PBOC ineffective in stimulating the domestic economies.
Adding insult to injury, the PBOC's expansionary monetary policies, targeted or not, tend to further increase the country's leverage, raise the risk of accelerating inflation, and sustain the precarious property market and hence the shadow banking market in the country.
The problem is not a lack of credit, but an excess of capacities.
What's really needed in China's present property market is destocking.
(Chinese readers: ****money.163.com/14/0807/01/A30R5SCT00253B0H.html)
To me, this problem is best solved by a genuine hukou/rural-land reform.
The healthy companies do not really need the banks' credits to sustain their businesses.
Some of the extra bank credit will only serve to sustain the lives of those zombie companies, as in Japan, or go to the non-self-liquidating projects of the local governments.
China may walk the road of Japan, by constantly using stimulative policies to cope with the impacts of short-term economic downturns.
(Chinese readers: ****nieriming.blog.caixin.com/archives/74996)
According to Likonomics, it's best to enact real structural and economic reforms to solve the country's problems.
Also, to cure the patient's diseases, fiscal and incomes policies are now more effective than monetary policies, even though it's the latter, not the former, which has occupied the limelights of most financial reports in the newspapers.
One of the greatest puzzles facing me right now is the following.
If China's banks fully know that keeping on lending money directly or indirectly only to the local governments' financing platforms, and to the SOEs and the property sector with excess capacities, at the expense of the country's efficient SMEs and SMiEs, is not sustainable in the long term, and is a dead end from the point of view of the whole country, why don't they change their lending strategies ?
Are the banking officials in charge simply afraid of losing their jobs if those loans given to the SMEs mostly become bad debts ?
If so, then it's too good to be true !
One of the most pressing problems of the country --- very high cost of capital facing the country's SMEs in the real economy --- can quickly be solved by a simple central government directive (China's banks are in essence part of the government) :
'Keep on supplying funds to those private enterprises.
All of you will get the same total salaries and benefits, and won't lose your jobs or be punished, no matter what.
This is an order !'
Well, not only you but I myself can't believe this problem can so easily be solved this way, or the PBOC wouldn't have enacted all those targeted monetary policies in recent months.
Whether all those new credits will really end up in the hands of the 'targets' is anybody's guess.
(Chinese readers: ****www.financeun.com/News/201487/2013cfn/152753272400.shtml)
Perhaps habit really dies hard.
It's human nature that we refuse to change, even when we fully know that sticking to our guns means the sky is going to fall on our heads.
Not change but human nature is the only constant under the milky way.
In the good old days, the Portuguese and Spanish people mostly thought short-term, that's why their empires also lasted for a relatively short period of time.
The British people thought long-term, and hence Pax Britannica lasted for a relatively long time.
If the Chinese people keep on thinking short-term, and care only about their own short-term benefits, Pax Chinica will forever remain only a dream of them.
It won't be realized.
My guess is that Chinese people's 'habit' of short-term thinking may have something to do with the country's present property rights structure.
Without fully enforced private property rights, it makes complete sense for the people to grab whatever they can touch today --- who knows what will happen tomorrow morning ?
Not communism but 'the Tragedy of the Commons' is the spectre forever haunting the country.




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