Tuesday, January 3, 2012

Too early to get excited about China’s growth

It may be premature to assume that China’s growth will continue at its recent pace. Here are some thoughts on the topic.

1. The over-50 Manufacturing PMI number that everyone got excited about may be an aberration. Also a similar blip took place back on 2008 before the real slowdown.

China Manufacturing PMI (Bloomberg)
Michael McDonough (Bloomberg Economist, Hong Kong): China's better than expected PMI is likely to be an anomaly, thanks to early Chinese new year. Forward looking components still below 50.
An example of a forward looking component is the employment PMI (see chart).

China employment PMI (Bloomberg)

2. Property correction is still in play.

3. Social unrest remains a risk.

4. GDP will have to move to more sustainable levels, which China is not used to. Here is a quote from ISI (International Strategy and Investment):
ISI:   Real GDP slowing to 7.2%. We are below consensus. Soft landing. More monetary easing.
Clearly we are not coming off the cliff, but it’s too early to assume it’s easy sailing for China.
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