Flash Crash – PMI slips further

PMI slips again

China’s Flash PMI – the Purchasing Manager’s Index early call – came in at 47.1 this morning, well below what economists were expecting and well down on last month’s 47.8.

It’s a further sign of the weakening economy and comes after China devalued the RMB by a total of 4.5% last week.  The currency has stabilised since then, but this flash PMI seems to have brought the equities market undone.   The Shanghai sharemarket dropped 3% this morning, with the index now below Beijing’s preferred floor of 3600.

According to Reuters, this result is the worst since March 2009, at the depths of the Global Financial Crisis, and marks 6 months straight of the index being below 50. Manufacturing makes up an important part of China’s economy, and while the services sector is growing in areas such as tourism, China needs a strong foundation for its economic health.

The survey also revealed that businesses are laying off staff in light of lacklustre demand.  The PMI survey also looks at new export orders and new domestic orders, but both numbers are down to 2-3 year lows.

To my mind, Chinese authorities have a two-fold problem on their hands, quite apart from questions about which economic tools they might use to correct the situation.  For one thing, the rhetoric amongst its citizens will turn negative, and lower growth will become a self-fulfilling prophecy.   The more people think there’s a problem, the more real the problem becomes.   That’s why so much internal Chinese media is focused on delivering positive messages.  The second problem is that when prices start falling, the natural propensity is to step away.   See how far prices can fall before buying. Again, that’s a self-fulfilling process, because prices have no choice but to fall in the absence of buyers.

In that respect, the PMI – even the flash number – is not just a leading indicator, it’s also something of a boost.  When things are going up, it a boost in that direction, but when things are going down, it’s a boost in the wrong direction.

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