MONTREAL - The latest survey of
China's purchasing managers, an early gauge of
changing economic conditions, indicated a
weakening of domestic demand, adding to concern of
a slowdown throughout Asia, although data from
South Korea and Singapore looks more positive.
The HSBC/Markit flash PMI, which comes out
ahead of the government's data. was reported at a
lower than expected 48.1, the fifth consecutive
month under the neutral 50 level, and down from
49.6 February.
Output fell 50.2 to 47.9
and new orders to 46.1 from 48.5, the
latter hitting a four-month
low signifying the worrying weakening of domestic
demand and raising the likelihood of more monetary
easing of the near future, if not immediately.
HSBC's China economist Hongbin Qu was more
worried by the lowest employment reading since
March 2009, which could suggest that "slowing
manufacturing production was hindering
enterprises' hiring desire", although in the view
of Danske Research the current slowdown remains
"substantially less severe" than in 2008.
A slight counterpoint to the positive side
was registered by two countries notable for
sensitivity to consumer demand in the developed
economies. Singapore's external trade statistics
for February, released last week, saw non-oil
domestic exports rise by 30% on a year-on-year
basis, strongly contrasting with a 2.4% decrease
the previous month.
This rebound came from
both the electronics (up 23%) and the
non-electronics (up 34%) sectors. Leading
non-electronics exports were ship and boat
structures, pharmaceuticals, and specialized
machinery. The United States, Hong Kong, and
Thailand accounted for the largest part of the
February increase; among emerging-markets, the
growth was due mainly to Latin America.
South Korea likewise failed to follow
China's downbeat as inflation there fell to a
14-month low, and even as unemployment rose,
albeit only slightly, to an 11-month high of 3.7%
(seasonally adjusted), mainly due to a larger than
usual increase in workforce participation. Finance
Minister Bahk Jae-wan appositely commented that
the free-trade agreement with the US that came
into effect last week could "play an instrumental
role in creating jobs".
A few days later,
he might also have mentioned the trilateral
investment agreement concluded in draft form this
week with Japan and China. Details have not yet
emerged on the accord, which is yet to be signed,
but according to the Financial Times, South Korea
is seeking especially to protect its intellectual
property as it plans to construct more and more
sophisticated factories in China.
A summit
among the three countries is foreseen in May in
China and would be an appropriate time for its
signature.
The bellwether MSCI Asia
Pacific Index of the region's equity markets is a
useful pointer to expected economic performance
over the next six to nine months. It has weakened
since the end of February in response to a series
of economic statistics from various countries, and
not only China's most recent flash PMI; but it has
done so largely independently of the Chinese stock
markets. The Shanghai Stock Exchange Composite
(SSEC) index, for example, was a bit stronger than
the MSCI index, until it tried and failed for the
third time to penetrate its 2,450 resistance to
the upside.
The MSCI index, by contrast,
stalled about a month ago in its assault on its
own 130 resistance level. The MSCI index found an
important short-term support at 125, but it is
still perilously meandering downwards from 127
after having recovered a bit higher. The 130 level
is a significant resistance that marks the
boundary between the index's middle and the upper
post-crisis trading ranges.
The SSEC, on
the other hand, has now broken through its own
long-term support at 2,380 to the downside,
although a short-term support remains (so far) at
2,320. Lower than that, a support is to be found
only at 2,245 before the very long-term support at
2,150 may assert itself. The SSEC has now clearly
failed yet again in its attempt to break through
its post-crisis second-fan to the upside; and this
cannot augur well for the economy itself, for
which the stock market is a leading indicator.
The South Korean KOSPI equity index, by
contrast, remains at its own October 2007 level,
which it is testing for support, while the Straits
Times Index in Singapore remains torpidly trapped
below a two nontrivial medium-term resistances.
What is perhaps most bothersome to
observers is the combination of continuing
declines in Chinese real property markets together
with the mountain of Chinese local-government
debt. For example, the SouFun 100-city index of
property prices fell for the sixth month running
in February even though developers cut prices in
response to earlier declines in residential sales.
At the recently concluded National
People's Congress, Premier Web Jiabao called
housing prices unreasonable and called for
policies to continue restraining the sector.
However, central government policies aiming to
dampen the rise in property prices could adversely
affect the overall national growth rate.
As for the debt, Chinese banks were told
last month to roll over local government debts
accrued through the economic stimulus that
countervailed against the post-crisis slowdown, in
order to gain breathing space to look for a real
solution to the problem.
The consensus
view is that the proportion of non-performing
loans will be so high as to compel the central
government either to assume the debt itself or
otherwise take palliative measures having, in the
end, similar results. The prospect of such a
process snowballing out of control is what gives
some plausibility to the "hard-landing" school of
thinking about China's economy, which still
nevertheless remains in the minority.
Dr
Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of
Technology and The University of Michigan, has
researched and taught at universities in the
United States, Canada, France, Switzerland, and
Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also
consults privately in a variety of
fields.
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