Sunday, April 1, 2012

What is the real China PMI?

Investors were glued to their computer screens (yours truly included) on Saturday night @ 9 pm edt. China official (Politburo) Mfg PMI was being released then. It came in @ 53.1 - way above expectations. Traders took to Twitter in celebratory lap: "This market is going to rock on Monday". Only 90 minutes later, HSBC Final Mfg PMI @ 48.3 showed a much different picture. Nobody even noticed or cared, as it is weekend for God's sake, and attention span of investors is quite short nowadays anyway. I also understand that in bull market bad news gets ignored.

We have witnessed many unresolved divergences during the last few months affect virtually nothing in this bull market, yet this one deserves a deeper analysis, as the slowdown in China has been in the center of traders' attention lately. The Politburo data comes from large gov't enterprises, while HSBC gets theirs from small to mid-sized private companies. Also we have absolutely no idea how accurate the official data is, while HSBC explicitly details data collection and index calculation process in their report.

So who do we believe? At first I thought it is appropriate to ask the question. But as I think more about how different the sources of the data are, I realize that there are two economies inside of China. Large government-controlled manufacturers are getting a preferential treatment, while smaller mfg's may be falling off the radar in tougher times. While I think that there are no 100% private companies in China, small to mid-sized companies are probably more affected by gov't regulation and/or lack of easy credit, as commercial lending has tightened. RRR cut was widely expected, but now is in question due to better Politburo PMI. And even if it comes, large gov't enterprises will always have their funding, but it is less certain for smaller firms. We are also left wondering if smaller manufacturers are being blocked from deals and gov't monopoly is continuing to run wild, just as everyone is led to believe that capitalism is being widely embraced by corrupt Chinese officials. There is just not enough evidence and not enough reporters are talking (or allowed to talk) about this. Fear of their access being cut off by Chinese authorities is enormous.

So, the more correct question is - how will the market react on Monday? First of all, China is closed for three sessions, due to holiday. The rest of the world financial markets will have to decide on their own which PMI to believe.
I put the last 12 months of data on the chart below. I think that it is only going to get harder to forecast the real China Mfg PMI from here on. My biggest hope is for HSBC to analyze the data from Politburo and come up with a blended index. But then you have to assume that gov't data is real. I do not know how to verify that.

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