Manufacturing slowdown in China – A cause for concern as we head into 2014?

China’s National Bureau of Statistics released the country’s official Purchasing Managers Index (PMI) number for the month of December 2013 on New Year’s Day 2014, which showed a contraction to 51.0, from the consensus estimate of 51.2. The October and November 2013 official numbers were held steady at 51.4. The final HSBC-Markit PMI number for the country for the month of December 2013 showed a moderate increase of 50.50, versus the prior estimate of 50.80. A reading of below 50.0 shows a general manufacturing growth contraction. China’s Shanghai Composite Index was last trading at an average level of 2,108.85, down by an average of less than 0.4 percent, with 9.71 billion shares traded on the exchange as of 1005 hours (Hong Kong/Singapore time). Meanwhile, according to surveys conducted by real estate services firm E-House China, and the China Real Estate Index System (CREIS), both sets of data showed moderate increases in prices of real estate in the country during the month of December 2013, suggesting some signs of a stabilising home price appreciation (HPA) growth outlook in 2014.

The impact of the latest release of China’s official manufacturing numbers for the month of December 2013 have been felt most on the foreign currency, and commodities markets during early Asia-Pacific trading hours on the first trading day of the year. The Australian (Aussie) Dollar was trading at relatively tight ranges at an average spot rate 0.8800 – 0.8900 to the US Dollar, and the price of gold (XAU) trading on the COMEX exchange was last traded at an average price USD 1,204.30 per ounce, up 2.4 percent on an intraday basis. The prices quoted were as of 0835 hours (Hong Kong/Singapore time) on January 02, 2014. With the Chinese economy being the main driver for commodity-rich currencies such as the Aussie, the Lonnie (Canadian Dollar), and the Kiwi (New Zealand Dollar), the latest manufacturing number coming out of China is quite a significant event for these countries’ currencies in general, as well as the global outlook for commodity prices in 2014 as China is still ranked as one of the huge global importers for natural resources including copper, coal, gold, steel, among others.

Some of the questions frequently asked by readers and investors are how is China’s economic slowdown going to impact the global economy, and whether the latest reading on the manufacturing growth slowdown signals a major shift in China’s overall economic outlook in 2014? The answer could not be easily addressed without looking back on the critical issues that might have contributed to the slowdown in China’s economy, including the local government debt levels, ‘shadow’ banking system, one-child policy, ‘hukou’ or the allocation of city, municipality welfare benefits for migrant workers, property price surges, and one of the most important issues needs to be urgently tackled in 2014 is the ongoing pollution problems in major cities such as Beijing, Shanghai, among others. According to a Bloomberg Television journalist quoted during early Asian trading hours on January 02, 2014 where he cited the pollution issue has caused much of China’s arable land to shrink in size, or declared infertile by the agricultural authorities in many parts of the rural regions in the country. This is quite a growing concern, especially when food shortages, contamination issues surrounding drinkable water, are continuing problems faced by many Chinese government officials as the country embarks to the next decade under the relatively new leadership of President Xi Jinping, and Premier Li Keqiang.

According to excerpts drawn from many business wires including Bloomberg News, and Thomson Reuters, President Xi was quoted in his 2014 New Year’s Day message as the nation’s first-term President where he outlined that the government must press ahead with reforms to improve livelihoods and make the country “rich and strong.” Premier Li Keqiang commented in October 2013 that the nation needs to maintain at least an average 7.2 percent economic growth momentum in order to secure jobs, and the communist party urged local officials to broaden their focus, rather than to focus solely on how to increase the nation’s gross domestic product (GDP) growth. The government and many private sector economists have forecasted the country’s GDP growth for 2013 is expected to show an average of approximately 7.6 percent growth, a steep slowdown as compared to the historical pace of 9.0 to 10.0 percent growth, while for 2014, several economists being surveyed by Bloomberg News have forecasted a moderate growth slowdown to between 6.9 to 7.2 percent.

As investors look ahead into 2014, China’s pace of economic growth might well be one of the closely watched events, on top of the concerns over the US Federal Reserve (US Fed) easing of its monetary stimulus programmes starting this month in January 2014, concerns over the state of the Euro-Zone recovery outlook, Japan’s economic growth momentum along with its weakening Japanese Yen (JPY) currency, global manufacturing growth momentums in countries taking place in China, the United States, Euro-Zone, housing outlook in the United States, rising government debt yields as a result of the gradual withdrawal of monetary stimulus coming from the US Fed, among other economic issues. The International Monetary Fund (IMF) has earlier forecasted a global average of 3.6 percent for 2014, which came in line of expectations. To some of these investors, and market observers, China’s expected slowdown in economic growth for 2014 appears to be growing concern, but for others, the expected slowdown will not necessarily suggest a derailment of the overall fundamentals of the Chinese economy. Although reforms were being outlined during the Third Plenary session in early November 2013 and are gradually being implemented across the nation, it does take some time for these policies to show results due to the lag effect, but the country’s economy is unlikely to develop into a crisis stage, like a credit event, or sudden drop in the growth momentum. The Chinese government is careful in ensuring the continued stability of China, and will not hesitate to intervene in the markets in order to quell any uncertainties.

However, the expected slowdown of China’s overall economic growth is a source of major policy concern as some of the urgent economic issues including leverage, and continuing property price surges, if not being monitored closely by all sections of the Chinese government could result in social divides, potential civil unrest, among others which the Chinese leaders will not want to witness it happening as in the case of the Tiananmen Massacre in 1989, where scores of university students were killed or purged by the Chinese government authorities for their alleged roles in the civil unrest. With the latest reminder coming from President Xi that the Chinese government should do more to help to bridge the rich-poor divide, many Chinese government officials, together with the provincial, municipality, and city officials have been ordered by the Chinese leadership to introduce and implement policies that help to ensure jobs protection, and gradual introduction of open market style reforms that will help to transform China as one of the global leading economic powerhouses for years to come. However, whether these reforms will help to ensure the continued stability of the Chinese economy remains uncertain and it should be an interesting development to be watched closely in 2014.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc