• Tue
  • Dec 23, 2014
  • Updated: 4:46pm

Mainland factory sector growth hits 3-month low

Bigger-than-expected drop in HSBC China PMI points to need for more relaxed state policies

PUBLISHED : Friday, 22 August, 2014, 1:21am
UPDATED : Tuesday, 26 August, 2014, 3:05pm

The mainland's factory sector expanded at its slowest pace in three months as new orders and production moderated, a private survey showed, increasing the pressure for more policy easing given the slowdown in the economy.

The HSBC flash China manufacturing purchasing managers' index fell to 50.3 from 51.7 last month, trailing economists' average forecast of 51.5.

The data "suggests the economic recovery is still continuing but its momentum has slowed again", said Qu Hongbin, the chief economist for China at HSBC.

"We think more policy support is needed to help consolidate the recovery. Both monetary and fiscal policy should remain accommodative until there is a more sustained rebound in economic activity."

Almost all the PMI sub-indices declined, with output dropping to a three-month low of 51.3 from 52.8 and new orders sliding to 51.3 from 53.3. Export orders also declined, albeit less drastically.

We think more policy support is needed to help consolidate the recovery

"Given the HSBC PMI tends to lag [month on month industrial production] slightly, it may be a reflection of weaker growth momentum in July amid tighter monetary conditions and less aggressive policy measures," Goldman Sachs economist Song Yu said.

Earlier this month, official data showed total social financing, the broadest gauge for credit, fell last month to the lowest since November 2008. Industrial production growth decelerated while real estate investment rose at the slowest rate in nearly five years.

Analysts said the latest survey underscored the pains that small and medium-sized enterprises had suffered from weak demand and tight credit, given the HSBC PMI's greater sample focus on smaller businesses compared with the official PMI gauge to be released by the National Bureau of Statistics on September 1.

But such a situation might be temporary and seasonal, analysts said, with most seeing a rebound in industrial activity this month as credit conditions normalised.

Still, economists are split over how aggressive Beijing's easing policy may turn in the rest of the year as the leadership has vowed to defend the annual economic growth target set at about 7.5 per cent.

The economy expanded 7.4 per cent in the first half, thanks to the government's mini-stimulus policy, including reserve requirement ratio cuts for banks, reduced taxes for selected small firms, and acceleration in infrastructure projects.

In the latest efforts to reinvigorate the economy, the State Council said it would cut tax rates for qualified high-technology companies to as low as 15 per cent. That compares to the 25 per cent rate for most companies on the mainland, although the favourable treatment may affect a limited number of enterprises.

Citigroup said it might take a sharper downturn, such as PMI falling below 50, for the government to intensify its policy easing, including adopting broad-based reserve ratio and interest rate cuts. Barclays Capital said two interest rate cuts in the second half would help the economy expand 7.4 per cent for the year.


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Many China watchers seem to suggest the use of more easing policies after the announcement of the latest worse-than-expected statistical figures.
But prolonged monetary accommodation enables the banks to delay any serious effort to clean up their balance sheets.
'Zombie lending' does not work and should not persist.
Also, reducing borrowing costs, by lowering the interest rates, would diminish the incentive for the local governments to put their fiscal houses in order.
As Japan's experience shows, prolonged fiscal and monetary stimulus is not a recipe for faster growth (or maintaining the present growth rate).
Keeping on buying time may mean no real economic reforms are actually performed.
The proposed Super Regulator should make a rigorous cleanup of the banks' balance sheets, and submit the banks to an asset quality review and stress tests.
(Adapted from 'A European Lost Decade ?', Project Syndicate)
The money market funds, which allow the buyers to withdraw their money on demand, should also be supervised as well.
The following article shows that upgrading the economy needs a deep integration of technology and finance.
The three big engines of economic growth in the US comprise the high-technology industries in the Silicon Valley, the innovative cultural businesses in Hollywood, and the multi-tier financial capital markets in Wall Street.
Together they have formed a Golden Triangle, mutually reinforcing each other.
(Chinese readers: ****blog.sina.com.cn/s/blog_4fa0c56d0102v1da.html)
In China, it can be said that now there also exists a Golden Triangle, comprising urbanization (hukou reform), reindustrialization (climbing up the value chain), and farming modernization (rural-land reform).
They should be developed at the same time so that they will be mutually reinforcing each other in a beneficial manner.
The world population has been migrating to the coastal cities.
This trend is still going on, like those in California and Tokyo.
China should and can follow the same trend.
(Chinese readers: ****zhuoyongliang.blog.caixin.com/archives/75627)
Developing the very costly urbanization alone, using tens of trillions of dollars, in order to prop up the aggregate demand and sustain the future GDP growth rate, without getting all the commensurate benefits from the other two corners of the triangle, may be proved to be unworkable in the long term.
(Chinese readers: ****t.163.com/5479705518/column/5188665454542702525)
Talking about golden triangles, there's also a golden quadrangle in China at present, that formed by the policy banks, the local governments, the property sector, and the SOEs.
I think this geometric structure is self-explanatory.
Together they dominate the monetary flow of the country's circular flow of income.
Of course the complementary real flow is dictated by the main components of the monetary flow.
The new banking loans in the country, targeted or not, cannot easily escape from the attraction of this quadrangle --- a black hole.
It's said that some SMEs are now reselling their newly-received targeted loans to some of the corners of the quadrangle, rather than using them to develop their own businesses.
Or they become loan sharks themselves.
Also, small 'enterprises' can easily be formed by the SOEs or the property developers to obtain the targeted bank loans from the policy banks.
Some property developers collude with the banks, obtain the targeted loans, using their land as collaterals.
Where there's a will, there's a way.
Instead of spending more on R&Ds and becoming more innovative, some of the SMEs want to become profitable scalpers, or speculate in the property market, because in this market, one can easily 'make a fortune by simply lying on one's bed'.
Without subduing the dominant property sector, which is part of the virtual economy, it's not easy for the country's real economy to climb up the value chain and become truly innovative.
The U-turn of the HSBC manufacturing PMI seems to have somewhat coincided with the U-turn of the yuan's exchange rate.
The enthusiastic, too-optimistic, and misled market has too quickly bid up the yuan relative to the US dollar in the foreign exchange market.
The US dollar has been strong, the Korean won and the Japanese yen have both been weak, but the yuan kept on revaluing against the US dollar recently.
The PBOC seems to have given up its intervention in the market, by only setting the daily mid-rate of the yuan.
One simple way to guage whether the yuan is overvalued or undervalued is not to look at the size of the monthly trade surplus, which is misleading, but to look at whether there is pressure of internal devaluation or revaluation in the domestic economy.
Given China's excess savings, and her massive exports tax rebates, the country's trade surplus cannot easily be reduced to zero.
Considering the persistent negative growth of the PPI in the past 29 months and the recent still-low CPI data series (provided the numbers were correctly reported), internal devaluation has been going on to restore the external competitiveness of the country's tradable sector, which is dominated by the country's SMEs.
This is also shown by the diminishing FDIs into the country's factory (tradable) sector.
Given the too-quick rise in the (minimum) wage rates in the Chinese cities, with no commensurate increase in labour productivity, the yuan is also overvalued to some extent.
According to Bloomberg Briefs' Fielding Chen, 'based on a trade-weighted basket, China's currency is actually 20% over-valued.'
Another way to buy more time for further real reform in China is to continue devaluing the yuan, rather than continue increasing the already-very-large money stock.
Continued yuan devaluation, or more stable exchange rate, means less increase in funds outstanding for foreign exchange, due to less inflow of carry-trade hot monies, and the PBOC can continue her truly independent monetary policy to genuinely cope with the real needs of the economy, according to the impossible trinity.
Many people think that the yuan's continued revaluation can 'reverse coerce' the Chinese manufacturing industries to upgrade their technologies and climb up the value chain.
To me, 'reverse coercion' is a much less effective policy than most people think.
It's much better to reduce the exports tax rebates to discourage the Chinese exporters from maintaining the status quo of using low technologies.
It's also better to lower the costs of capital facing the Chinese SMEs to enable them to become more competitive.
At such high costs of capital, and facing persistent rise in labour wages, they cannot even survive in the foreseeable future, let alone spending more money on R&Ds.
The present rather quick yuan revaluation may also be induced by the coming Shanghai-Hong Kong through-train arrangement.
As an ordinary stock investor in Hong Kong, you may be eager to invest in some of the shares in China's stock market through the through-train arrangement.
But when doing so, you must be very careful indeed.
Read the following Chinese article first before you invest any of your hard-earned money there.
To me it's quite impossible to use the through-train arrangement to 'reverse coerce' the Chinese stock market to behave in the 'normal' way.
What's more probable is that the water in the Hong Kong river will be contaminated by that flowing from the Chinese river.
The present Chinese stock market is a standard sample reflecting the fact that the Chinese government's supervision endeavour, for various reasons, has failed miserably.
Together with the recent news about China's corrupt bond market, we cannot really depend on the country's direct-financing markets at present to quickly solve the high-cost-of-capital problems.
But the present model of mainly depending on indirect-financing (banking loans) to support her fast economic growth, as in the past 30 years, seems to be no longer sustainable.
A Super Regulator in the State Department, comprising and unifying the present People's Bank of China, China Banking Regulatory Commission, China Insurance Regulatory Commission, and China Securities Regulatory Commission, has to be set up as soon as possible.
It should be headed by a capable and very-high-ranking government official (like Wang Qishan, Secretary of the Central Commission for Discipline Inspection), to overhaul the country's supervision functions in the respective fields.
Desperate diseases must have desperate cures (治亂世,用重典).
If not, many of the country's laws and regulations will continue to be disregarded and the Chinese people's respect for their laws will become lower and lower over time.


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