Renewed commodity demand and a rise in manufacturing activity in China are being heralded by many as justification for the global “green shoots” recovery argument.
Much of this sentiment was reinforced this week when Hong Kong brokerage CLSA reported a rise in its Chinese purchasing managers’ index. The survey supports official figures from the Chinese government which had recorded a rise in factory output for two consecutive months already.
As the FT wrote:
…the purchasing managers’ index for Chinese manufacturing published by CLSA, the Hong Kong-based brokerage, rose to 50.1 in April up from 44.8 a month earlier, signalling an expansion in factory output for the first time in nine months.
The output and new orders components showed particularly strong growth in the CLSA index, in which a reading above 50 indicates an increase.
Which led CLSA’s head of economic research Eric Fishwick to conclude:
“China’s government has been extremely successful in stimulating investment,”
And the FT to sum up as follows:
Perhaps more than any major economy, China is showing signs of improvement, writes Geoff Dyer. Indicators suggest that the economy began to recover in March with industrial production rising 8.3 per cent from 2.8 per cent in January-February.
But could it all be a bit of false hope? Could we, in fact, be misinterpreting a temporary stimulus-induced economic pick-me-up as an actual sustainable recovery?
Former MPC member and prolific FT blogger Willem Buiter cautions that that might exactly be the case. He pointed out earlier last week, China has — after all — done very little to address the rudimentary problems its economy is facing. What’s more, as the only viable green shoots do come from China in his opinion, any turnaround in this position risks knocking the whole recovery theory on its head in one fell swoop. As he explained (our emphasis):
The only reasonably convincing evidence of ‘green shoots’ comes from China. That, however, is unlikely to be sustainable, as it is very much the result of a ’same-as-it-ever-was’ package of fiscal, monetary and credit policy measures by the Chinese authorities. The export- and heavy-industry led expansion they have successfully engineered is the way of the past. It will go nowhere, unless China transforms the composition of both production and demand in the directions that are unavoidable (and also desirable) for a country at its level of economic development. Apart from China, the only green shoots I have seen were in the salad bar of the hotel I am staying at.
Whatever the manufacturing indices may be telling us, the commodity picture tells a somewhat different story. Yes buying of copper and other materials is up in April. But how those materials are actually being used is far from clear.
One major economic indicator of China’s rampant growth has always been its growing appetite for crude and petroleum products. And it is here that the picture seems to contradict the argument that a sustained recovery is already beginning.
CBI China, an authoritative source on Chinese commodity import and exports, shows for one that China is suffering from the same product overhang affecting the rest of the world, and mainly the US.
Gasoline demand may still be firm, but gasoil (aka heating oil) demand — mostly used in industry — fell 12.6 per cent in the first quarter of 2009. Prospects for May, meanwhile, look equally weak.
As CBI write (emphasis ours):
Propsects for May:
Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.
There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.
Sean Corrigan, chief investment strategist over at Diapason Commodities, also points to a continuing slide in China’s overall electricity consumption:
Indeed, as we have noted before, China’s own electric power generation which at a 13.4% CAR had closely tracked industrial output growth of 13.7% for a decade - dipped again in April to leave the total for the last seven months a sizeable 8.5% below that for the equivalent period in 2007-08.
Power consumption, of course, can be seen as a good proxy for the overall state of the manufacturing sector and ties neatly with the above reports of continued collapse in industrial demand for gasoil — particularly in the industrious south of the country.
All in all, very contradictory to the view that a recovery has really begun.
Related links:
All back to normal … or is it? - FT Alphaville
Power generation in China down 3.55% in April - Xinhua
