Good news from China

HSBC’s China flash PMI for October resumed growth jumping from 49.9 to 51.1. Just about every component made a turn for the better:

This is something of a surprise, though perhaps it should not have been. The turnaround is being led by export orders, probably to the US where the August debt-ceiling shock has clearly passed rapidly. Rather than completely derailing the Christmas buy, it seems to have delayed it somewhat.

This is some real fuel for the rally to run on, which is clearly the way the ASX has interpreted it this afternoon. It still doesn’t alter my view on the next year, with big risks to growth remaining from European and US austerity but this development does set up a short term positive feed back loop for global growth that offers the hope that the private sector can provide enough demand to offset austerity (at least in the US). As US consumers come out of their policy shock stall and retailers there find themselves short of inventory, more orders can be expected for China and it, in turn, can consume more of US exports. A positive loop.

That’s the first time I’ve been able to say that in many months. I wouldn’t stand in the way of this rally now (with the caveat that Europe must deliver a package sufficient to mitigate its risks for a few months at least).

That does not resolve the other risk building in China, it’s still deflating fixed asset bubble but it does mean that for the time being, there is no convergence of that deflation with a US led accident in Chinese exports. Hope for a Chinese soft-landing will rise correspondingly.

Houses and Holes
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        • okay i will debate you the numbers are even more rigged than western numbers and they just locked up a chinese central bank analyst for leaking probably better data. the data coming out of the US was all fine until it wasnt. but mostly i agree with your analysis especially in medium term (ie debt implosion mostly related to missallocation of capital in fixed investment). it still a ticking timebomb and the short of the century

    • Sure … but I was waiting to see if Shanghai joined the “risk on” party when it resumes trading.

      Just quickly checking the ASX8 I see Rio has jumped 5%, but the banks are up almost 3% as well. Looks like more highly-correlated market movements to me.

      So I don’t know. A PMI 0.1 either side of 50 doesn’t seem such a big deal to me. After all, its not Chinese production of widgets that’s driving Australia’s resources boom, its construction of buildings and infrastructure.

      • That’s the point. All movements are correlated now, around macroeconomic success and failure narratives.

        We now have a real short term success narrative to rally on rather than just European fumes.

        • I don’t think that the negative sentiment has really correlated with economic data recently H&H. Much of the data from during the last Euro scare has been quite bullish. Of course, I think people are looking for hope so this newfound hope will probably feed off itself.

        • So what happened to the US recession the ERCI was predicting so confidently only a few weeks ago?

          Has the recession vanished in puff of data?
          Has China decoupled and is madly exporting to Asia?
          Is China exporting to Europe?

          All seem highly implausible to me.

          • That’s more like it.

            I can’t speak for the ECRI but my recession call was and remains the result of fiscal cuts in Europe and the US.

            I don’t resile from that base case but it’s fair to say that I miseed the possibility that a post August bounce in US consumption would drive a feedback loop with Chinese production and consumption. Silly really. If the US has sustained external demand it can keep growing, albeit slowly.

            Whether that is enough to offset the fiscal cuts remains a moot question. But the rising stock market can also amplifiy this mini-cycle we’re now in.

            Europe is still headed for recession (as the US may still be too) but again, the equity rally can boost confidence until next year if there’s a package of support that is enough to make markets forget defaults for a few months.

          • Data from China has always been ambiguous. Every “expert” gives a different story.

            I’ve yet to read the report in full, but on memory HSBC use electricity use as one of their indicators.



        • Lorax: It’s jumped from -0.1 to +1.1, which seems a reasonably large swing.

          All this is dependent on Merkozy coming up with a deal, still – a failure there would lead to a no-questions-asked risk-off, especially given the chunk of the current rally which is operating on the European fumes.

          Finally, in political terms, could this be a leading indicator of the break Obama is looking for? An economic recovery into 2012 there would swing things just in time for the election.

    • They’re in shock at your exuberant headline, checking that they are indeed on the Macrobusiness site…

    • Your post seems to confirms what was reported this month that the US is starting to spend again. How long will it last for? Positive though, and the first bit of good news for a while.

      A bit of China info I though was amazing:

      I don’t know if you’ve seen the Wal-Mart ships (Emma Maersk), but one is in service and two more on line by 2012. It’s alleged that they return to China empty. It’s interesting to see the volume of China’s goods being shipped to just one US retailer.

    • You seem disappointed with the lack of a feisty response 🙂

      But having just come across this it looks like a “nothing to see here, move along story” so far as the data goes.

      I said as much last month as well. These numbers look to be well within the probable margin of error. So I don’t think we can say things are getting better or getting worse or trending one way or the other.

      Significantly the seasonal fluctuations w.r.t. things like export orders are pretty big. I doubt that you can seasonally adjust with the sort of precision implied by these numbers.

  1. I can’t debate you. There is nothing standing in the way of a rally now. China looks great, US looks great. The Euro Bailout hope will continue to push this rally until the day it is announced when it will probably surge again. The only headwind is probably Australian house prices and our two-speed economy suffering from a high dollar again. But don’t expect the RBA to support the underdogs.

    I only see one problem with the new found hope. The bigger they are, the harder they fall. And I am simply talking about the debt issues which are no-where near resolved, all over the world. Austerity will bite. It will not likely be offset. Most importantly, any period of hope that does lead people to go and binge more on credit just makes the situation more dire when the bill is due.

    However, these are long/medium-term issues and therefore don’t exist.

  2. I think this is a backward-looking glance, but it is too early to know if this will will confirm the beginning of a new expansionary cycle in orders and orders, or not.

    The new orders and production components appear to lifted a couple of months ago, repeating the cycle of 2010 but with less vigour this time. This suggests to me that industrial output is still showing signs of fatigue and that it is too early to confirm a strong new expansion.

    This also invites the question – from where will new demand originate? From the US? Most unlikely. From Europe? That is out of the question. From within China? Maybe-maybe-not.

    I remain a pessimist.

    • Fair points. I agree. I’m not seeing a strong new expansion. Rather a mini-cycle with enough life to keep the equity rally going…think I better change the title…

      • Yep, we don’t need strong growth, just a tiny bit of it and optimistic outlooks from central bankers.

        I am certainly shocked by how little deleveraging is going on. I really think that the psychology of consumers these days trumps any potential or current crisis. I mean, drug addicts will destroy everything in order to get just one more fix. The situation with consumers may not be so different, except where alleyway credits may break your legs or kill you, legit credits simply spur you on.

      • For some reason when we look forward, we express our ideas as if we expect things to move in straight lines even though we know (from looking backwards) that things are nearly always oscillating-swerving-pausing-recoiling. Things almost never move in straight lines, or even in predictable arcs.

        I think this way of talking about the future reflects the way our brains work. When we are forming opinions about the future, we have to rely on inductive reasoning – on our ability to draw inferences on the basis of (necessarily) incomplete information. Since we do not have factual information about the future to which we could apply deductive reasoning, we use simplified, provisional projections instead.

        Needless to say, simple, provisional conjectures are effortlessly corrected. As new information becomes available, observations and analysis replace suppositions.

        This applies unless you are a perma-bull, in which case you re-construct incoming data so it can be construed to match your predictions…..:)

  3. Sounds too good to be true. So is it?
    If I had a stomach of steel I’d join the rally for a few months. Unfortunately not gutsy enough and still pessimistic about the outlook for next year. I got out of the game in Oct 2007, dabbled a bit in early 2010 and then pretty much completely out since April last year.

  4. The good news from China has been followed by very bad news from Europe. October PMI indicates contraction at the fastest pace since 2009. Which begs the question, where did the demand for Chinese manufacturing come from? US? Does the data look at which sectors contributed to the expansion?