China, nothing to see here | FT Alphaville

China, nothing to see here

The HSBC/Markit flash China PMI for July fell below the 50-mark to 48.9. It was 50.1 in June, making the biggest fall since March 2009 and the first negative result since July 2010.


(Cue some more slowdown/stagflation worries.)

The news apparently was a bit of a dampener on markets, despite those rising hopes around European and US debt deals. And yet plenty of pundits are not that worried.

This Thursday note from Barclays Capital is an example:

We think the weak reading reflects: 1) seasonal factors as industrial activities tend to slow in the summer; 2) further moderation in growth, as the earlier policy tightening is expected to show more visible effects in slowing domestic demand in H2; and 3) the HSBC PMI tends to focus more on the externally-oriented small and medium firms, compared with the NBS PMI, which tends to have a more balanced and wider coverage in terms of industries and survey samples.

That said, we do expect the semi-official NBS PMI, due on 1 August, to also post a decline from June’s 50.9, possibly testing the 50 threshold. Historically, the NBS PMI tends to post a seasonal decline in the summer, averaging -2.5% m/m from 2005-2010 and -1.7% in 2010 (Figure 1). This usual seasonal decline would imply a number of around 50 this July. We expect the PMI to start recovering gradually in late Q3, as was the case in 2010.

And even Dr Doom is unfazed, telling the Wall Street Journal:

“We are worried about a Chinese hard landing but that may not materialize until after 2013,” Mr. Roubini said.

But what about all that local government debt?

Stephen Green of Standard Chartered says the problem is “large, but solvable”.

Then there’s the IMF report released on Thursday. It was generally positive on China, saying that growth remains solid despite the global outlook; inflation should peak soon — barring more food price shocks – with high structural unemployment and unemployment keeping wage inflation in check.

On credit, they say:

Stress tests—conducted by the authorities as part of the FSAP process—suggest that the banking system is generally capable of absorbing significant downside risks. However, given the large expansion in credit in the past 2½ years, a coordinated shock on multiple fronts (including lower growth, a sharp real estate downturn, and higher interest rates) would leave some of the smaller private banks with insufficient capital to meet regulatory requirements. The key risks to credit quality remain concentrated in loans to local government financing vehicles, off-balance sheet lending, and, to a lesser extent, credit to the property sector. A full assessment of these various risks is, however, hampered by serious data gaps, weaknesses in the information infrastructure, and constraints on the FSAP team’s access to confidential data.

What we don’t know won’t hurt us, perhaps?

Related links:
If (when) China slows down – FT Alphaville
On the matter of the misvalued Chinese land – FT Alphaville