The recently reported flash PMI for China factories indicates that industrial activity may be seeing the end of the slowdown. The Markit report used by HSBC is a preliminary one, which is to be followed later by a final reading, with all the data completed.
The flash PMI readout for April was 49.1, compared to a 48.3 final reading for April. While a reading under 50 still indicates economic contraction, the April flash reading is the highest in several months.
China PMI Source: clearmoney.com
If the data is later confirmed by the final reading, it may confirm what have been not only intimations, but clear signals that the slowdown in China’s economy may be nearing a bottom. The new orders sub-index, which indicates export activity, is also showing signs of a pickup. Furthermore, there are pockets of robust activity such as the recent results in China from tech giant Apple (AAPL), as well as consumer activity edging up, particularly in the luxury markets.
Manufacturing’s Direction
The HSBC manufacturing PMI index fell into the 40s during the global financial crisis years of 2008 and 2009, but had moved up smartly above the 50s and had held there through the first half of 2011. The HSBC measure uses an index that is made up largely of smaller, private companies, where the China official PMI measures activity that includes the larger state owned enterprises, so usually delivers a higher reading. Thus the official PMI reached a reading of 53.1 in March, which indicated that manufacturing had picked up earlier than the HSBC index had. There was also a corresponding increase in the export data, new orders.
If we take the more severe measure, the HSBC index, while it still indicates economic contraction, the flash reading strongly suggests that the contraction has markedly slowed. Still, observers on the ground in China indicate that there is oversupply in Chinese manufacturing which will still have to be worked off. Recent earnings from global heavy equipment maker Caterpillar (CAT) showed its China business still a bit soft. Yet again, there are intimations that this situation may be changing sooner rather than later, as in such bulwark industries as steel and energy, there is some evidence of demand turning. China recently also announced that it will increase spending on infrastructure investment such as railways, airports, bridges and roads to boost growth.
The Apple Factor
Apple’s recent blowout earnings contained a strong China flavor. In the Greater China region, Apple’s iPhone sales generated $7.9 billion for the quarter. The company’s total revenue for the quarter was $39.2 billion. Apple sold five times as many iPhones in the Greater China area as it did in the same quarter a year ago. The strong consumer demand for Apple products, particularly iPhones, in China, shows no signs of abating. Apple will now have China Telecom (CHA) as an official carrier of the iPhone, with China Mobile (CHL), which has twice as many wireless subscribers as does China Telecom, looming as a potential future carrier.
Apple Revenue Breakdown Source: techcrunch.com
The Consumer Factor
Beyond the Apple factor, there are a flurry of carmakers pouring into China either to get a toehold or strengthen an existing one. Nissan (NSANY.PK) as well as Volkswagen (VLKAY.PK) are just a couple that come to mind, though Ford (F) is also ramping up its operations. China is still a huge, fertile market for automakers, either for its diffuse batch of domestic manufacturers or the big-name foreign players who form partnerships with Chinese companies. Although the auto trade had temporarily cooled off in China, expect it to heat up again. The premium luxury car market is flourishing as well as premium goods from such luxury goods makers as Coach (COH), showing the high-end consumer continues to gain strength. Some of the global giants in fast food, McDonald’s (MCD) and Yum! Brands (YUM), have seen their torrid growth cool a bit, but the consumer is still resilient in China. Admittedly, neither the luxury trade nor consumption can carry the day yet for China’s whole economy, as export trade still rules, but the consumer segment grows every day in importance and whatever gains are made there are likely to be permanent. With more fine tuning likely ahead by Beijing, we would expect a soft landing to stay intact.
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