Submitted by Mark Hanna
There seems to be a dichotomy between the official Chinese Purchasing Managers Index – which focuses heavily on larger/state backed companies – and the private HSBC report which looks more at medium/smaller companies. The latter has been in contraction mode for quite a period of time, while the ‘official’ data has been in expansionary route. Take it as you will, but with any government data one must take a lot of salt before ingesting. Either way futures have not been affected much by last night’s PMI figure, which is the main concern in the near term. U.S. Manufacturing ISM is out at 10 AM – bulls certainly do not want to a see a sharp deceleration and in terms of the market holding the lower 1390s would be a good thing.
- China’s official purchasing managers’ index (PMI) rose to a 13-month high in April, signaling the economy has found a footing and may be recovering from a first-quarter trough, but smaller factories are still struggling. The pick-up in the PMI to 53.3 from 53.1 in March indicated a further expansion in the vast factory sector, although it was slightly below market expectations of 53.6. Readings above 50 signal expansion while those below 50 point to contraction.
- The manufacturing output sub-index rose to 57.2 from 55.2 in March. However, the National Bureau of Statistics noted many important industries remained weak with index readings below 50, among them chemicals, equipment, autos and oil refining.
- The improvement in manufacturing likely reflected restocking after a slow winter, said Ting Lu, an economist at Bank of America-Merrill Lynch.
- Although new export orders edged up to 52.2 from 51.9 in March, the sub-index for all new orders slipped to 54.5 from 55.1, implying that domestic new orders remained weak.
- Tight credit, especially for real estate developers and private firms, had helped push the Chinese economy to its weakest footing since the fall of 2008. But there are signs that the availability of loans is improving. New loans in April may have reached 900 billion yuan ($140 billion), the Caijing Magazine said this weekend, citing a recent report by China International Capital Corp, or CICC.
- “Policymakers continue to grapple with the challenge of loosening enough to prevent a sharp slowdown, but not loosening too much and sparking an inflationary spiral,” said Alastair Thornton, analyst at IHS Global Insight.
- While large-scale manufacturers continue to report growth, small firms remain in contraction, the statistics bureau said. The tight credit conditions have disproportionately hit smaller and private companies, as reflected in a survey of smaller factories by HSBC.
- The HSBC Flash PMI, the earliest indicator of China’s industrial activity, showed a stabilizing economy last week. That index’s reading of 49.1 for April came in below 50 for the sixth month in a row, reflecting a contraction in the factory sector, however the rate of deterioration slowed in a sign the economy may have bottomed out in the first quarter. HSBC is due to release its final reading for April on Wednesday.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog