International | May 24 2012
By Greg Peel
HSBC reported today its “flash” estimate of its independently calculated Chinese manufacturing purchasing managers' index (PMI) fell to 48.7 in May from 49.3 in April, implying accelerated contraction.
HSBC's number is not “official” and preempts China's own calculation due out on the first of the month. The HSBC number is also weighted towards small and medium private enterprises in China while Beijing's number is weighted towards larger, state-owned enterprises. Direct comparison is thus not accurate although the “tone” provides sufficient value. Many an economist is happier to rely on an independent assessment rather than on Beijing's often spurious data offerings.
The following chart shows both the HSBC and official PMIs have kicked up in recent months albeit the HSBC number has been more wobbly. Most importantly, Beijing has the Chinese manufacturing sector in mild expansion mode (above 50) while HSBC is signalling contraction (below 50).
A weakening Chinese manufacturing sector is not good news for global markets already reeling from the latest euro-crisis. To make matters worse, HSBC's new export orders sub-index has fallen to 47.8 on the flash number, down from 50.2 in April and implying a swing into contraction from expansion. Europe is China's major export buyer.
It may not be good news prima facie but global markets are likely to consider the upside to any weaker Chinese data, being a hastening or elevation of monetary policy easing from Beijing – that which the world is putting a lot of faith in. We have just had another cut in Beijing's bank reserve requirement ratio ((RRR)) so there may not be a rush to provide an immediate follow up, and Beijing is not about to respond based on an independent foreign estimate. However if the upcoming official number mirrors the HSBC number at least in direction, Beijing's next policy move may not be too far away.
Technical limitations
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