Take China Off Your List of Worries
02/21/2011 12:15 pm EST
Shanghai stocks are telegraphing a steady expansion in the face of monetary tightening. But unrest in the Middle East remains a wild card, writes Prieur du Plessis of Investment Postcards from Cape Town.
Markit released the Flash HSBC China Manufacturing PMI survey for February this morning, based on 85% to 90% of responses from purchasing managers. The flash estimate came in at 51.5, compared with the final 54.5 in January, as a result of a combination of seasonal factors as well as quantitative tightening.
Wow, what a drop! That will surely be negative for equity markets and especially the Shanghai Composite Index? No, not necessarily. The manufacturing PMI reading per the official Chinese Federation of Logistics and Purchasing (CFLP) survey in January dropped from 53.9 in December to 52.9.
Conversely, the HSBC survey's January PMI picked up to 54.5 compared to December's 54.4. According to the CFLP survey, the drop in January was in line with the apparent seasonal trend in the past.
What do I expect for February's CFLP manufacturing PMI? In previous articles I argued that the seasonal trend in January and February pointed to weakness, especially if the Chinese New Year and Golden Week fell in the early part of February.
The timing of this year's Golden Week was reminiscent of that of 2008. In 2008 the PMI in February picked up slightly from January, but I suspect the number for February this year is likely to be either unchanged or somewhat lower-but not the significant drop reported by the HSBC survey. My view continues to hold that March could see a significant rebound.
It is apparent to me that the markets do not really focus on the HSBC PMI survey but rather on the official CFLP survey. The Chinese equity market as measured by the Shanghai Composite Index is an excellent anticipator of the CFLP manufacturing PMI and leads the PMI by one month.
It is telling me that the manufacturing PMI in February will come in unchanged or slightly improved. The surge in Chinese equities since the end of the Golden Week indicates to me that the market shares my optimism regarding the seasonal strength of the PMI in March.
The bond market seems to share the optimism regarding the CFLP PMI in March and is looking through the current period of seasonal weakness.
Is the Baltic Dry Index trying to tell us that China's economy is stronger than generally thought?
I guess so. It is no wonder the People's Bank of China has again raised the reserve requirements of banks.
Are we therefore seeing a seasonal low in emerging-market equities? Maybe. But it is extremely difficult to anticipate the unfolding of the protest action in North Africa and the Middle East.