China: no "hard landing" but economy subdued
Simon Ward
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Concerns here about a Chinese “hard landing” eased in late 2011 as real money expansion revived on the back of policy actions and slowing inflation. Six-month growth in real M1, however, was still below average in December, suggesting moderate rather than strong economic prospects – see previous post.
Yesterday’s official manufacturing PMI results, showing the highest new orders reading since October, could be interpreted as supporting a more upbeat outlook. The official numbers, however, fluctuate seasonally, despite supposedly being adjusted for such variation. After applying Datastream’s seasonal adjustment algorithm, new orders slipped back in January – see chart. Based on the historical relationship, the current reading of a little over 50 is consistent with six-month industrial output expansion of about 5%, or 10-11% annualised – below a long-term average of 15-16%.
The “big picture”, therefore, is that China was in danger of a crash landing last summer but a subsequent easing of monetary conditions seems to have stabilised growth at a slightly below-trend pace. Such a scenario would be promising for markets, implying that China continues to contribute significantly to global economic expansion while domestic inflationary pressures ease at the margin, allowing further gradual policy loosening.
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