China is set to release a flurry of economic data this week, ranging from trade figures on Thursday to inflation, industrial output, fixed-asset investment and retails sales data on Friday – all of which could shed light on the true health of the world’s second-largest economy, especially given the confusion caused by the twin July manufacturing PMIs.
The government’s official PMI index and the HSBC’s measure told two different stories in July. The official measure of factory activity in China showed a slight expansion in July, but a separate, independent survey published at the same time by HSBC showed a “marked deterioration of business conditions faced by Chinese manufacturers.”
The official PMI rose to 50.3 in July from 50.1 in June, suggesting conditions had improved marginally in the manufacturing sector. (A number above 50 indicates expansion.) Meanwhile, the HSBC PMI fell to its lowest level in 11 months, dropping to 47.7 in July from 48.2 in June.
Part of the discrepancy can be explained because the two surveys use different methods to perform seasonal adjustments. The gap between the two indices widened to 2.6 points -- the biggest in 15 months. According to economists at Societe Generale, the two surveys diverge about a third of the time, usually due to differences in these adjustment techniques.
In the past, big gaps were usually mostly due to conspicuously insufficient seasonal adjustments in the official series. But since the second half of last year, the seasonal pattern in China's official reports has greatly diminished. In comparison, the HSBC series now seems to suffer more from seasonality, according to Wei Yao, an economist at Societe Generale.
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"Aside from the statistical issue, the HSBC PMI sample is overly represented by small exporters which were hit by rising Chinese yuan, rising wage and sluggish global demand. On the other hand, the government’s PMI is more represented by domestic big enterprises with large exposure to fixed-asset investment," according to Ting Lu and Xiaojia Zhi, China economists at Bank of America Merrill Lynch.
“At this time we should focus on the government’s PMI instead of the HSBC PMI because exports now only contribute 10 percent of China’s GDP,” Lu and Zhi said.
China’s second-quarter GDP growth slowed to 7.5 percent, putting the economy on track for its weakest year since the late 1990s.
July Data Outlook
Thursday – Trade Balance: June’s trade data were far worse than most had expected, with the value of both exports and imports lower than a year before. This slowdown seems to reflect both the weakness of foreign demand and the impact of official efforts to crack down on the use of trade transactions to evade capital controls. Capital Economics’ Mark Williams and Wang Qinwei expect export growth to have rebounded into positive territory in July. Imports probably performed slightly better as well, though a significant rebound is still unlikely given the apparent weakness of domestic demand.
Friday -- Consumer Price Index and Producer Price Index: According to Capital Economics, continued increases in pork and vegetable prices likely have driven consumer price inflation higher in July. Pork prices bottomed out in early May and have risen steadily in the weeks since. Meanwhile, vegetable prices have picked up sharply, with drought in southern China as the immediate cause. By contrast, Williams and Wang expect non-food price inflation to remain stable, as it has been over the last few months. China has had the lowest rate of headline inflation among the BRIC economies in all but 17 of the last 120 months. China’s CPI has averaged 3.1 percent over the last ten years, compared with an average of 5.6 percent in the rest of the emerging world.
Friday -- Industrial Production, Fixed-Asset Investments And Retail Sales: Industrial production growth edged down in June and economists expect it to have been little changed in July. According to Williams and Wang, recent weakness has shown up largely in light industry. The better performance of heavy industry is consistent with recent evidence of an investment recovery seen, for example, in rebounding sales of construction equipment. This may be an early sign that the surge in credit over the past year is finally be feeding into activity. “The fixed investment data will be worth scrutinizing for more signs,” they said. In addition, there’s no convincing evidence yet that consumer spending growth is picking up. Recent survey data show that consumer confidence and appetite to spend have remained low.
Aug. 10-15 -- Bank Lending: Interbank rates rose again in late July. This is typical at the end of a month as banks scramble to meet regulatory requirements. But market worries about a re-run of the cash crunch reappeared nonetheless. China's central bank added cash to the financial system last Tuesday, in an attempt to calm these concerns. The People's Bank of China offered 17 billion yuan ($2.77 billion) of seven-day reverse repurchase agreements, the first injection of that type of funds since February. For July as a whole, the average level of market rates was somewhat higher than during the first five months of this year. “The PBoC provided the funding at much higher costs, indicating no retreat from its stance against excessive credit growth,” Societe Generale’s Wei Yao said.