Why Little PMI Growth Screams, “This is a China Soft Landing!”

Overview

China’s Purchasing Manufacturing Index continues to bring positive news to the country as the economy is starting to appear to stabilise.

Article Highlights

  • Purchasing managers index remains unchanged at 50.4 in September
  • Alternative PMI figure by Caixin likewise remains unchanged at 50.1
  • Initial reactions suggest a stabilising economy

For the third month running good news has been announced throughout the manufacturing sector of the Chinese economy. For the month of September, a reversal of the previous contraction seen in the Purchasing Managers index (PMI) has continued for three months running.

The index is a useful tool which gives an overview of the general health of the manufacturing industry. Data is derived from a survey sent out to companies and encompasses five major indicators such as: inventory levels, production, new orders, employment environment and supplier deliveries. As with most statistics, it is not necessarily always the most accurate representation of the current environment. However, many value the index and the results are used to make key decisions within many companies.

While it was an unchanged figure of 50.4 for September, this does still represent growth as the index uses 50 as the mark for remaining the same. Anything below is a contraction, whereas all figures above shows a rise. Alternative measures such as PMI figure compiled by Caixin also support the latest results, with their own measure coming in at 50.1.

What Does the News Mean?

Initial reactions to the September PMI announcement has seen expects speculate on a possible stabilization of the manufacturing industry. Particularly in areas like production and demand. Furthermore, news from the non-manufacturing sub-index also suggests there is a growing confidence throughout the country.
A link can also be made between the manufacturing industry and the governments investment. Many local governments are continuing to invest into infrastructure, with a 19.7% spending increase being seen within the first 8 months of 2016 year on year.

Other experts believe that while this news is positive, there is a problem of short sightedness within the government. While the short term boost is welcome, economists are concerned with high levels of corporate date and excess capacity levels.

On the other hand, industrial profits have performed better now than at any point in almost two years, and export, industrial production and import figures all exceeded expectations.

The GDP

As we are gearing up towards the news regarding the third quarter, many eyes are anticipating the GDP growth figure. Analysts expect results to be equal to the 6.7% seen in both quarter one and two, which will continue to ensure the country is on track to meet official government targets.

While these figures may be almost half the decade high of 14.2% seen in 2007, the performance is still strong. While economies globally have stagnated following the global crisis, China has managed to continue growing, albeit at a slower rate.

The Future

All signs are pointing towards a stabilizing economy; however, this is not a foregone conclusion. With the government on a local and national level helping to stimulate the economy questions are being asked about whether the long term sustainability of this is realistic. Key issues like excess capacity issues are not being tackled hard enough, and increasing levels of debt continue to make some experts concerned. Overall though, for now, all positive news is welcome, and if the trend continues, the economy may start gaining more momentum as it looks to get back on track.

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