Chinese PMI Hints at a Bumpy Ride

When bad things come out from China, the market undoubtedly listens. After all, China is not only the fastest growing economy in the world, but it also ranks second in terms of GDP and exports and first when it comes to imports.

Two days ago, the market experienced a little shock when China’s June Manufacturing PMI by HSBC sorely missed expectations. The index printed a reading of 48.3, which was significantly lower than May’s reading of 49.2 and the forecast of 49.1. In addition, it hit its lowest level in nine months. The results of the survey was truly a major disappointment for market participants.

PoD Chart

What exactly is the HSBC Chinese Manufacturing PMI?

Before I go on further, I think it is best to explain first what exactly the HSBC Chinese Manufacturing Purchasing Mangers’ Index (PMI) is and what it has to do with the economy.

The HSBC Chinese PMI, which is published on a monthly basis, is the earliest available leading indicator for its manufacturing sector. Traders, economists, and analysts alike consider it a very good and accurate indication of how healthy or unhealthy manufacturing operating conditions are and will be over the next couple of months. A reading above 50.0 means that the industry is growing while a reading below 50.0 indicates that the industry is contracting.

Why the drop is significant

We see bad data all the time, so what makes the drop in the PMI particularly important? If you dig deeper into the report, you will find out that the section on new export orders contributed a big chunk in the disappointing figure.

Apparently, external developments have caused the section on export orders to plunge a whopping 4.9 points to 44.0, which is its lowest reading since the middle of the 2009 Great Recession.

As the second biggest exporter in the world, this is dreadful news as it tells us that global demand is collapsing. This is bad not only for China, but for the rest of the global economy as well.

The Chinese PMI is a stark reminder to us that the worst is not behind us yet. Despite all the positive data we have been seeing, it would be a mistake to expect a strong global growth to happen any time soon. Any further recovery in the second half of the year will probably be a very slow and bumpy one.