International | Feb 09 2009
By Chris Shaw
Recent economic data suggest improvement in the Chinese economy, as evidenced by the Purchasing Manufacturers Index (PMI) rising to 45.3% in January from just 38.8% in December. But in the view of Standard Chartered a closer look at the data is not as encouraging as it suggests. The economists have joined peers elsewhere in warning further weakness should be expected rather than things getting better.
The economists take the view that even though the PMI figure moved higher last month, the fact remains Chinese industry is still contracting and inventories are increasing. As well, the economists point out the employment PMI fell further last month, which indicates companies were laying off more workers in January than in December. Until this measure turns up, they argue, it is unlikely a sustainable recovery is underway for China.
Standard Chartered further points out sentiment among private sector firms declined even further in December, which is further evidence the shorter-term outlook for the economy is still unfavourable. Among the manufacturers, data show textile, timber, metals and non-metal minerals firms are still struggling, while the transport sector is also doing it tough.
The data on inventories is somewhat more mixed as it shows higher raw material inventories in January than in December, which the economists suggest is a positive on face value as it implies firms are starting to again invest in inventories. Offsetting this, the economists point out, is that inventories of finished goods were lower last month. This is a negative in PMI terms unless it is the result of higher sales.
Among the various sectors, upstream industries reported the sharpest increases, with inventories growing more quickly in the mining and raw materials sectors than in producer goods and consumer sectors. With industrial sales relative to industrial output continuing to fall Standard Chartered expects inventories will continue to grow, especially as weaker consumption is likely given slower income growth and rising unemployment.
This leads the economists to suggest the next few months could still be difficult before a gradual recovery can take place in the second half of the year.