Phat dragon

5 October 2011

a weekly chronicle of the Chinese economy

The September business surveys describe an economy that is

still expanding, if at a sub trend pace, with the manufacturing sector possibly stalled. The NBS manufacturing PMI rose to 51.2 in September from 50.9 in August (consensus 51.1). Phat Dragons seasonally adjusted estimate of the headline is an underwhelming 50.1 (versus a July estimate of 51.7), indicating that the manufacturing sector was treading water in the month. The alternative Markit-HSBC measure, seasonally adjusted by the issuer, was unchanged at 49.9, a third consecutive sub 50 reading. In the services sector, Markit-HSBC reported a modest bounce in September, with reasonably consistent improvements recorded across business activity, new business and employment.

China: services & manufacturing surveys

60 55 50 45 40 35 Jan-05 Services Composite Manuf NBS Manuf *
Markit-HSBC

index

index

60 55 50 45 40 35

Sources: CEIC, NBS, Markit, * Seasonally adjusted by Westpac Economics.

In the detail of the NBS manufacturing survey, finished goods

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

inventories were unchanged at 49.4. This indicator has now averaged 50.0 over the last six months, the second highest in the history of the survey, following last months record. New orders fell from 53.1 to 50.1. Over two months, the surprisingly strong July result has been unwound with interest. With inventories unchanged and orders falling, the new orders-to-inventories ratio deteriorated. It is now at 1.014 from 1.075 in July. The lowered September ratio no longer meets the criteria of higher than at any time since the Japanese shock, but it is still lower than it was immediately prior to the disruption. To Phat Dragon the former clause argues that the manufacturing sector took a genuine step backwards in the month.

New orders & export orders converge

65 60 55 50 45 40 35 Jan-05
NBS new orders* NBS new export orders* Markit-HSBC new export orders Markit-HSBC new orders
Sources: CEIC, Markit *Seasonally adjusted by Westpac Economics.

index

index

65 60 55 50 45 40 35

As for external conditions, imports fell back into the contractionary

zone, after two readings a sliver over 50 in July and August. Export orders improved in September, but they remain soft in absolute terms. The last seven readings are now 50.3, 47.9, 50.9, 49.5, 48.5, 46.9 and 48.4. The improvement in export orders pushed them above the overall new orders sub-index, closing a gap that was 5.2 index points wide a month ago. Given the state of the developed world right now, Phat Dragon doesnt need to tell you that is an embarrassing (and disturbing) comparison for domestic demand.

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Chinese exports by product & destination

Product
Note that processing exports using imported materials have a 36% share in total exports, spread across the three manufacturing categories.

Destination
Germany 4% Russia 2% Canada Other 1% Europe 16% India 3% Other Asia 16% USA 17%

At this juncture, it is worth refreshing ones memory of Chinas basic

trade fundamentals: what is produces and who it sells to. The points of vulnerability here are that a) Chinese exports are dominated by durable manufactured goods, a large proportion of which are linked into the regional processing and trans-shipment chain b) exports to Europe and North America each represent approximately one fifth of the total c) the resource rich regions that benefit from Chinas own demand represent only a little over 10% of its external sales. Phat Dragons eye has recently been drawn to the weakness in regional air freight activity, sharp falls in the manufacturing surveys for Korea and Taiwan, contracting activity in the electronics sector in Singapore and negative readings in the global leading indicators of the tech cycle. Each bodes ill for the processing and assembly trade that keeps the wheels of the export complex spinning.

mach and transport 49%

other manuf 24%

Light and basic 16% Chemicals 5% Fuels 2%

Food 3% Non-food raw materials 1%

North Asia 21%

Japan 8%

Africa 4% Latam 6%

Oceania 2%

Sources: CEIC, Westpac.

Cyclical momentum for the export sector then is more Munch than

Renoir. While Phat Dragon has been at pains to argue over the last decade that China is an investment led economy where exports do not lead investment, that is different from arguing that sharp declines in export activity do not matter (aka the extreme decoupling
Economic Research

view). Steep downturns in exports have always hurt headline GDP growth through the impact on the more affluent coastal provinces. That will continue to be the case. As a sub-aggregate cycle exports are secondary to only real estate and infrastructure and are respected accordingly by Chinas policymakers.

Stats of the week: Jewellery sales at Chinas top 200 retailers

are up 41%yr against a 14% gain in total turnover.
economics@westpac.com.au www.westpac.com.au

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