China’s huge manufacturing industry has slowed to a halt. The two monthly surveys of manufacturing activity suggested that yesterday as other surveys for Japan and Australia showed business, especially manufacturing, starting to turn up.
And apart from Germany, similar surveys released overnight showed the pace of activity improving across the eurozone and in the US.
But the good news about Japan and our sector was ignored in Australia because of the overwhelming importance of China’s economic health to the strength and future direction of our economy.
If Chinese manufacturing activity has slowed to a halt, that’s bad news for Australian exporters of iron ore and other commodities because it could signal further weakness in prices and volumes in coming months – just as the Australian economy is at its most vulnerable.
That’s why the stock market fell almost 2%, but the dollar rose a touch, despite the boomy sentiment in the market. Another $25 billion in value was dropped off the market yesterday.
But markets in Europe and the US ignored the Chinese data and rose. Our market is poised to open stronger this morning, but for how long?
The ASX200 index yesterday slumped 92.3 points or 1.9% to 4,710.2, while the All Ords lost 85.7 points or 1.8% to 4,689.7.
BHP Billiton (BHP) – the most exposed of all businesses to China with its iron, ore, copper, oil and other commodities – saw a 1.4% (43c) fall in its share price to $30.94.
Rio Tinto (RIO) (which is exposed via iron ore and copper) shed 1.2% or 64c to $51.73. But Fortescue Metals (FMG), which is on a virtual lifeline from China, suffered a 3% fall (9c) to $2.95.
YTD – BHP, RIO, FMG – China Gloom Hurting
The weakness in China is why Asian markets outside of Japan (which rose 1.3%) fell yesterday.
The two surveys, one from the official National Bureau of Statistics and China Federation of Logistics and Purchasing (which covers big companies) and the other from HSBC and Markit (which covers medium and smaller companies) both showed falls.
The official Purchasing Managers Index survey saw a reading of 50.1 – still slightly in expansion territory, but down on May’s 50.8. But the June reading was a four month low.
HSBC’s China Manufacturing PMI, released soon after, fell to a final reading of 48.2 in June from 49.2 in May, and it was a touch lower than the ‘flash’ estimate of 48.2 released last week. And it was a nine month low.
"The June PMI fall, across the board on major sub-indexes, indicates downward pressure in the economy," Zhang Liqun, an economist with the Development Research Centre, a top government think tank, said in a statement accompanying the official PMI’s release.
Chinese June and second quarter economic data will start being released at the weekend and into next week, culminating with the estimate for second quarter GDP growth likely to be closer to 7% than the official target of 7.5% annual (and the first quarter’s 7.7%).
“In terms of the magnitude of decline, this is the biggest decline in the past year,” said Ding Shuang, an economist with Citigroup told the Financial Times. “This is a picture of weak demand, both domestically and externally.”
The weak data comes on the heels after the credit/cash crunch which rocked Chinese markets in the closing weeks of June.
Economists fear that the damage caused by that attempt to slow lending will be transmitted to the wider economy in coming weeks, adding further downward pressure on activity and the surveys of manufacturing for July.
Weakness was felt across the board in the official June PMI. The sub-index for new orders fell to 50.4 from 51.8, while the output sub-index declined to 52.0 from 53.3. The employment sub-index remained depressed at 48.7, edging down from 48.8, an indication that factories are cutting jobs.
The HSBC/Markit survey agreed on the employment picture – suggesting that manufacturing employment had fallen at the fastest pace since last August, saying in a statement the “job cuts were due to a combination of employee resignations and weaker trends in output and new orders” .
HSBC’s chief China economist Hongbin Qu said in yesterday’s statement that falling orders and rising inventories added pressure to Chinese manufacturers in June. And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions” for small- and medium-sized enterprises.
In Japan, the quarterly Tankan survey of business showed a bigger than expected rise back into positive territory. The Tankan survey is conducted by the country’s central bank, the Bank of Japan, and it indicated that big companies in the country have turned positive for the first time in 18 months.
The survey showed a rise to 4 from minus 8 in the March survey (it means optimists outnumber pessimists). Big companies also said they expected to boost investment spending by 5.5% in the next nine months of the Japanese financial year. That’s a surprise given the previous survey forecast a fall of 2% in the 2013-14 year.
It’s a sign the attempts by the central bank and the government to break the deflationary grip on the economy are starting to have an impact. Figures out last week showed that the deflationary presses eased in May for a third month in a row.
And in Australia, the monthly PMI survey from the Australian Industry Group and the Commonwealth Bank showed a big rise for the second month in a row. That brought it close to growth with a reading of 49.6, up 5.8 points from May and up 12 points in two months.
The fall in the dollar has played a part as did a rise in output. The last over-50 reading from the PMI was in June 2011. Did the wet weather along the east coast for much of June boost demand for power, which caused higher production? But the survey showed that employment was still contracting.
