China’s latest PMI came out today and it seems the media is taking a cautiously negative approach to the numbers. The manufacturing index fell to 48.5% according to HSBC, and 50.2% according to state sources.
While these numbers reflect a declining manufacturing sector that brings some issues to the region, it also represents progress towards China’s political economic goals.
The falling manufacturing index negatively impacts surrounding Asian nations that in the past were dependent on an infrastructure-crazed China’s imports. China’s manufacturing, steel, and iron sectors had been fueled by massive construction and city infrastructure projects for years, serving as the motor for China’s rapid economic climb. It’s only natural that the nations nearby adjusted their economies to feed the infrastructure behemoth.
Problems have begun to plague China’s old economic approach, as pollution is climbing the charts towards becoming the most popular complaint of Chinese citizens, rampant apartment construction has led to runaway speculation and a housing bubble as well as ghost cities like Ordos, and lending to local governments has led to poor banking practices and an overabundance of credit.
To remedy these problems, the new Chinese leadership under Xi Jinping and Li Keqiang have pledged to transform the economy from one dependent on infrastructure, construction, and cheap exports to one that relies on domestic consumers. Once this change was declared, it was only a matter of time before the markets began to take note of declining manufacturing and export numbers in China. That is exactly what we are seeing now.
Certainly, some of the slowing can be pinned on the Lunar New Year festival, which fell at the end of January and beginning of February, but overall there has been a downward trend in areas that most analysts have been accustomed to seeing prosper. The important thing now for analysts is to have patience and continue to watch domestic economic measurements, like the service sector, which posted growth across the holiday season.
As for neighboring Asian countries, it’s time to switch from commodity exports and towards exports that can feed the coming onslaught of Chinese consumerism. Chinese consumers may see their incomes begin to increase in the future, especially if more capital enters China as its capital market continues to open.