Global Financial Markets Analysis: China - No Hard Landing

Introduction

Following my article from earlier this year,[1] on whether there exists a possibility of 'Hard Landing' in China, in this very brief article I revisit the conditions and reassess the current situation in China based on some of the latest economic data points out of the PRC (People's Republic of China) released by National Bureau of Statistics, China.

GDP Growth and PMI Data

There has been a significant deterioration in the economic conditions in China as evident from the latest set of data points. China’s GDP growth for the second quarter slowed to 7.5% and down from 7.7% in the first quarter. Although 7.5% is the target set by the government this will be the first year with the slowest growth since 1990.

Figure 1. China GDP growth, Source: Wall Street Journal[2]

Another important metric – HSBC China Manufacturing PMI also shows continuous deterioration during the last couple of months. HSBC PMI data recorded a value of 48.2 in June and down from 49.2 in May. A reading below 50 indicates contraction. The latest HSBC Flash China Manufacturing PMI for July shows follow-through down of the earlier contraction in the PMI number from June (48.2) with a value of 47.7 for July which is at 11-month low. The PMI numbers are depicted in Figure 2 and Figure 3. The figure shows clear downtrend of the manufacturing conditions and hence economic scenario and would help investors to stay away from China for the time being unless the situation improves.

Figure 2. HSBC China Manufacturing PMI (June 2013), Source: Markit [3]

Figure 3. HSBC China Flash Manufacturing PMI (July 2013), Source: Markit [4]

Retail Sales

The aim of the current government is to spur economic growth through domestic consumption but retails sales have not been impressive and not helping as well towards that purpose. A look at the latest retail sales figure shows that retail sales was up 13.3% in June and 12.9% in May 12.7% for the first half of the year compared to 14.3% for the first half of 2012.

Figure 4. Auto and Retail Sales, Source: Wall Street Journal[5]

Conclusion

Looking at the current economic data points including GDP growth, PMI numbers, etc. investors should be wary of the current economic scenario in China and wait for further improvements before taking up any decision on investments in China. At the same time I believe the GDP contraction will continue below 7.5% and the government may have to bring the lower level of the forecast down few notches to match the actual GDP numbers for the quarters ahead. Although there may not be an immediate threat to ‘Hard Landing’ (GDP growth below 5%) as I have stated in my earlier article and the government will intervene with easy monetary policy and economic (including infrastructure) stimulus, with the current economic scenario the government proposed GDP growth targets looks aggressive and needs to be revised.