Monday, September 14, 2015

Economics: Barking At The Wrong Tree - China`s Economy Is Healthier Than The Media Tell You

(Drivebycuriosity) - China is in a big mess, tell us the media. There is a lot of talk about the supposed hard landing of China´s economy. But the reality is brighter than the media tell you. Yesterday (yes on Sunday) we got at least 3 signs that China doesn`t crash: Industrial production growth in August edged up from 6 % to 6.1% and retail sales rose 10.8% in August and up from the 10.5% in July (abc). We also learned that China’s steel output climbed in 7% August from a month earlier (bloomberg ). Last week we also heard that power use and rail freight increased in August as as well (theguardian). These economic data don´t signal a free fall, rather a slight improvement.

But, the positive news are downplayed and ignored. Some hedge funds and other speculators have strong interests in a bad sentiment for China because they are betting against the country. The financial markets, the media and the majority of the pundit are obsessed with another indicator, the Purchasing Manager Index for Manufacturing (China manufacturing PMI,) which dropped in August to 47 points.  Numbers belowe 50 indicate a supposed contraction. The falling China PMI caused the sharp drop of the global stock markets in August (reuters).

But the PMI doesn`t reflect the real (hard) economic development which is reported by the retail sales and the industrial production. The PMI is based on a poll  (wikipedia). Purchasing managers (employees who are responsible for buying goods or services which are needed for the company) are asked about the situation in their company and industry. As any poll this inquiry leads to subjective answers and reflects rather the sentiment than hard data. So the falling PMI is a reflection of the dire sentiment and a lousy indicator for the real economy.

The August numbers aren´t the worst. In 2008 the China Manufacturing PMI fell toward 40 (red line in the chart above), signaling a sharp contraction even that China´s economy grew 9.6% in 2008.

Financial markets, the media and the majority of the pundits are barking at the wrong tree. China´s real economic situation is healthier than the picture of the PMI suggests. I believe that more solid Chinese economic data will follow in the coming months which should heal the sentiment and kindle a comeback of the stock markets.

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