The extensive financial crisis in debt-riddled Europe is continuing to have serious repercussions for their primary import supplier.
Steeply declining euro-zone demand has put China’s economy under intensifying pressure and calls for government intervention are increasing. Last week Commerce Ministry spokesman Shen Danyang predicted that the trade situation for the world’s second largest economy would be ‘more grim’ over the second half of the year. This coincided with a report showing that foreign direct investment in the nation declined for the eighth time in July, dropping to $7.58 billion – 8.7 per cent down on the previous year.
Now it appears that China may soon have to respond to demand and implement more monetary and fiscal stimulus after a private survey revealed the high possibility of sharply increased manufacturing contraction in August. Although the latest data is preliminary, it has served to highlight the likelihood of sluggish growth continuing for a seventh quarter.
Markit Economics and HSBC Holdings Plc recorded a Flash Purchasing Managers’ Index reading of 47.8, 1.5 less than July’s final figure of 49.3. If this initial reading is corroborated it would be the weakest for ten months and make the string of continuous readings below the expansion-contraction divide the longest of any in the history of the index.
According to HSBC the Flash PMI is based on 85 to 90 per cent of responses given in a survey issued to over 420 companies. A statement was issued with the data in which Chief China economist at HSBC Qu Hongbin alluded to the impact of the international financial market and proposed measures to be taken; ‘Chinese producers are still struggling with strong global headwinds. To achieve the stated policy goal of stabilising growth and the jobs market, Beijing must step up policy easing to lift infrastructure investment in the coming months.’
Westpac Bank chief currency strategist Robert Rennie summarised the data as ‘a very poor update’ and expressed the belief that there would be ‘some very poor China data to come’.
Six consecutive quarters of slowing Chinese growth have already negatively affected commodities markets. Miner BHP Billiton put a $20 billion Australian expansion project on hold due to an uneasy outlook and falling prices. Entering a seventh quarter can only make the uncertainty worse.
During the 2008-2009 global economic crisis China employed a mammoth stimulus package but the possibility of triggering similar action in this instance has met with reluctance. Up until now the steps taken by Beijing include funding new investment projects, slashing the amount of money held in reserve by banks (RRR), lowering benchmark lending rates and fast tracking fiscal expenditure.
It has been generally expected by analysts and traders that another RRR cut is forthcoming. Many believe that such action is essential if banks are to boost lending. Bank of America-Merrill Lynch economist Ting Lu certainly feels it is a necessary step, stating: ‘I would cut RRR tomorrow’.
Despite this, fears of flaring inflation have resulted in the People’s Bank of China adopting a different approach. Rather than cutting rates the PBOC is boosting the interbank money market with a 278 billion yuan injection – the largest since January of this year. The temporary effect of this move gives the central bank greater flexibility than an essentially permanent RRR cut. However, yesterday Central Bank Governor Zhou Xiaochuan did assert that additional rate adjustments were still a possibility.
The release of such concerning Flash PMI data has inspired many to vocalise concerns and urge that decisive measures are swiftly taken. Although this could galvanise the situation, action may be put off until the final PMI data is released on September 3rd.
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