March PMI Data for China Out.

Sunday, April 5, 2009 23:42

Friday’s news that China’s PMI climbed over the 50 yard line to reach 52.4 in March came as comforting news to many of the China’s media outlets. It has been nearly 6 months since this figure was out of the red zone, and it provided an opportunity for policy makers to tout the success of their 4 trillion dollar stimulus.

CLSA however remained far less optimistic of the rebound as their own figures (as reported by the WSJ article China Factory Data Suggest Recovery ‘Still in First Gear’) show that any recovery is still in its infancy (if there is a recovery at all) and that celebrations are still premature:

Manufacturing activity in China declined in March for the eighth consecutive month as prices and new orders continued to weaken, according to the CLSA China Purchasing Managers Index issued Wednesday.

The index, a gauge of nationwide manufacturing activity, fell to 44.8 in March from 45.1 in February, CLSA Asia-Pacific Markets said.

Interesting to note here that CLSA is coming out to say that the governments figure is off nearly 8% (gov’t line is 52.4 / CLSA is 44.8).

More specifically though:

The new-order component of the index dropped to 43.6 in March from 44.2 in February. At the same time, downward pressure on prices from idle capacity appeared to worsen. The output prices index dropped to 41.3 in March from 45.6 in February.

which is contradicted by the NBS statistics:

The output index rose to 56.9 percent in March, up 5.7 percentage points from the previous month. The new order index jumped 4.2 percentage points to 54.6 percent.

The index measuring new export orders rose 4.1 percentage points from February to 47.5 percent. The figure, although still below the threshold of expansion of 50 percent, showed the depth of decline has been narrowing.

“The continuous rebound of the PMI not only shows the government economic stimulus package has begun to take obvious effect, but also indicates a stabilizing and warming economy,” said NBS head Ma Jiantang.

so who is right? what is going on here? Is China’s NBS (National Bureau of Statistics) putting lipstick on the pig, or is CLSA simply looking to grab some headlines by being the open contrarian?

.. and what does any of this mean really, and if we were to assume for a moment that the 52.4% was a true figure, what should we make of it?

So first, who should we believe? This is an issue that I have faced in China when looking through statistics from nearly any reporting group, and my honest answer has always been not to believe anyone. To use the number as a starting point, but to then look at what was going on around me to put together a picture relevant to me and my clients.

the NBS has historically done a poor job of presenting the picture as a result of 2 things: biased reporting on the ground (i.e. local NBS officials inflating/ deflating numbers per their need) and inconsistent reporting (i.e. different regions reporting different numbers via different reporting formats). Taken at face value, this number should actually be unaffected by both as it is created from a group of 700 manufacturers, and is a targeted number that should not have any material differences when asked. However, where the statistical errors are going to enter into the picture is the fact that a large number of those 700 firms are going to be large private/ state conglomerates who have their own internal reporting issues, and who know that they are supposed to do their part to support the stated goal of 8% and a recovering economy.

CLSA on the other hand, Like UBS and many other banks, is developing research for their clients and to develop new clients. so, it is part research and part brochure (I don’t mean it to sound like a bad thing). However, through these documents they have a few systemic issues that are going to skew their results. first, as it is a marketing document, they need to appear to be a knowledgeable source while at the same time providing number that are desperate from the governments – they cannot give their clients the government line. Second, their access is going to be limited. While I believe that their data has a much lesser degree of adulteration, I must also recognize the fact that their data is perhaps going to be skewed as their sources will be different than the government sources. Not always a bad thing, but could explain why there is a difference.

What do the numbers mean to me? Little. Last week, while traveling by bus through Zhejiang it was abundantly clear that the manufacturing sector was off. Way off. In one city alone, I only saw 2 factories (in roughly 20) that had bicycles out front to indicate that laborers were working. It was not a town of dormitory factories, but one where residents would ride to the office. So, 2 of 20 were operating. Speaking to several other friends in textiles, auto, and consumer goods, and the stories of closed factories and layoffs were alarming.

Additionally, and where I am myself a bit alarmed… assuming the PMI did reach 52.4 percent, and it was the result of the massive stimulus and massive amounts of bank loans, the ROI on the stimulus was horrible…. In fact, for all the liquidity and preferential policies that have been unleashed in the market, the fact that it has only now crossed the 50 yard line – and barely at that – signals that we are really in trouble.

the US is still contracting, EU is still contracting, and China is eeking out … and we have already been through the easiest money of the stimulus. Every bit of the next waves are more expensive to fund, and unlike the first wave from the major powers earlier this year, some very difficult decisions will have to be made at the global economic level that I believe few are prepared for (see victor Shih’s recent article Legless Stimulus in China and Paul Krugman’s recent article China’s Dollar Trap

In closing, regardless of whether or not the NBS or CLSA are right, calling the recent developments as a rebound after 4 months of improvements I believe is premature. there are still signs of problems everywhere, and while one could argue the money spent has bought a economic reprieve from the worst economic decisions, the fact is that without a sustainable stimulus and a overhaul of the systems to address core issues, we could still slip back below the line.

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