Global PMI Scorecard: A turn for the better led by the U.S. and China

Monday, January 9th, 2012

The acceleration in global economic activity since the lows in October gained traction in December.

The JP Morgan Global Composite Index improved to 53.0 from 52.0 in November after falling to 51.4 in October. While the improvement in the composite PMI could virtually be attributed entirely to a significant improvement in business conditions in the U.S., the improvement in December was more broad based. The U.S. continues to lead the way, though, as my GDP-weighted Composite ISM PMI taking into account the Non-manufacturing Business Activity Index (the basis Markit uses to calculate the composite PMIs) instead of the PMI itself improved further to 55.7 from 55.4 in November. The manufacturing sector experienced accelerated growth increasing to 53.2 from 52.7. The ISM Business Activity Index remained unchanged at a relatively robust 56.2.

China, Brazil and India contributed significantly to the acceleration in global economic activity. China reversed the unseasonal slump in November in both the manufacturing and non-manufacturing sectors while Indian industries accelerated to near robust levels.

The contraction in the Eurozone’s private sector eased markedly for the second consecutive month. My calculated GDP-weighted PMI for the Eurozone rose to 48.3 from 47.2 in November and 46.6 in October. After stagnating in November, growth in Germany’s services sector is accelerating again while the services sector in France has stopped contracting. Elsewhere in the Eurozone the situation is dire to say the least, with the services sector in Ireland joining the contraction in the other debt-ridden Eurozone countries. However, the contraction in the Eurozone’s manufacturing sector, including France and Germany, continues. The acceleration in growth in the U.K.’s services sector from near stagnation in November is noteworthy.

The situation in Australia’ manufacturing and services sectors has stabilized while Japan is showing signs of acceleration in growth. The contraction in Hong Kong and Taiwan eased somewhat but the contraction in South Korea’s manufacturing sector deepened. In the Middle East, Saudi Arabia’s economy remains robust but growth in the Emirate states is faltering.

Note: ISM Non-manufacturing Business Activity Index used instead of Non-manufacturing PMI.

Sources: *Markit; **CFLP, Li & Fung, Plexus Asset Management; ***ISM, Plexus Asset Management; ****Markit, Plexus Asset Management.

Sources: Markit; CFLP*; ISM**; US Business Activity Index***; Plexus Asset Management.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Asset Management****; ISM*****.

Tags: Acceleration, Activity Index, Business Activity, Business Conditions, Composite Index, Contraction, Eurozone Countries, Global Economic Activity, Ism, Jp Morgan, Lows, Manufacturing Business, Manufacturing Sector, Manufacturing Sectors, Markit, Pmis, Second Consecutive Month, Services Sectors, Significant Improvement, Stagnation
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Global PMI Scorecard: Global Growth Still Strong but Moderating

Monday, April 11th, 2011

Manufacturing PMIs

The manufacturing PMIs for March indicate that the pace of the robust global manufacturing sector has moderated. My GDP-weighted PMI for the major economies fell to 56.0 from 58.2 in February.

The pace of expansion in the US eased slightly to a still robust 61.2 in March from 61.4 in February. The pace in the Eurozone also eased to 57.5 from 59.0 in February and easing was widespread. Greece, on the other hand, has seen a moderation of the contraction in its manufacturing sector. The UK’s manufacturing sector moderated relatively sharply from a robust 61.5 to 57.1.

As expected, the expansion in Japan’s manufacturing sector was halted as the impact of the terrible disaster is being felt. After registering its second consecutive month of expansion in February, the manufacturing PMI dropped from 52.9 to 46.4. The huge turnaround in Australia’s manufacturing sector in February came to an abrupt end in March with the PMI falling to 47.9 from 51.1. China’s manufacturing PMI rebounded from 52.2 in February to 53.4 in March, mainly due to seasonal factors. Taiwan failed to follow mainland China, though. The manufacturing sectors in emerging economies generally followed the weaker trend with South Africa (RSA), Russia and India the exceptions.

Sources: Markit; Li & Fung; Kagiso; ISM; Plexus Asset Management.

Sources: Markit*; Li & Fung**; Kagiso***; Plexus Asset Management****; ISM*****.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****.

Where the still relatively robust global manufacturing PMI numbers were likely to lead to improved global industrial production growth through end June, this year a hiccup is facing global industrial production in coming months, especially in light of the tragic events in Japan.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****; I-Net Bridge

The immediate outlook for industrial metal prices is therefore cloudy.

Sources: Markit*; Li & Fung**; Plexus Asset Management****; ISM*****; I-Net Bridge.

Non-manufacturing/Services PMIs

The JPMorgan Global Services PMI for March got hammered as it dropped to 54.0 from a robust 59.3 in February.

The ISM non-manufacturing sector in the US eased from a very robust 59.7 in February to 57.3 in March. In the Eurozone the robust services sectors of France and Germany upped the pace again, but elsewhere in the Eurozone the PMIs came in mixed. Spain again fell back into contraction while growth in Ireland’s services sector moderated sharply, finding itself on the brink of contraction.

March was characterised by a significant rebound of the UK services sector as the PMI rose to 57.1 from 52.6 in February. Japan’s services sector took a huge smack as the PMI dropped from 49.8 to 35.3 on the back of the disaster. The contraction in Australia’s services sector again deepened with the PMI falling to 46.5 from 48.7 in February.

In the emerging economies the robust expansion in India’s services sector has moderated slightly. China’s non-manufacturing PMI surged to 60.2 from 44.1 in February – in line with the seasonal pattern.

Sources: CFLP; Plexus Asset Management.

The rate of expansion in Russia’s services sector has steadied while the expansion in Brazil’s has accelerated.

Sources: Markit; CFLP; ISM; Plexus Asset Management.
*Japan is off the screen due to the disaster’s impact on the numbers.

Sources: *Markit; **CFLP, Li & Fung, Plexus; ***ISM, Plexus; ****Markit, Plexus Asset Management.

GDP-weighted/Composite PMIs

On a GDP-weighted/composite basis where the manufacturing and non-manufacturing/services are both taken into account, the growth in global economic activity decelerated sharply in March, taking the JPMorgan Global Composite PMI index from a robust 59.4 in February to 54.7. That compares to 58.3 in January and 57.1 in December last year.

Sources: *Markit; **CFLP, Li & Fung, Plexus; ***ISM, Plexus; ****Markit, Plexus Asset Management.

Sources: Markit; Li & Fung; ISM; Plexus Asset Management.
*Japan is off the screen due to the disaster’s impact on the numbers.

Summary

US economy: GDP-growth accelerating

My GDP-weighted ISM PMI for the US leads US real GDP growth by a quarter. At this stage it continues to indicate first-quarter GDP growth in excess of 3% on a year-ago basis and may even touch 3.5%. If the current robust manufacturing and non-manufacturing PMIs hold up through end June, the year-on-year GDP growth could reach 4% and beyond in the second quarter, barring any fallout from the Japanese disaster, that is.

Sources: ISM; FRED; Plexus Asset Management.

Eurozone: GDP growth to gain momentum in Q2

The PMIs during the fourth quarter of 2010 indicates that GDP growth in the first quarter is likely to come in at approximately 2.5% compared to a year ago and, barring any fallout from the Japanese disaster, to accelerate to 3% in the second quarter.

Sources: Markit (various internet sources); I-Net; Plexus Asset Management.

China: Still going strong!

As I expected, my calculated GDP-weighted PMI for China spiked in February, due to the reversal of the seasonal weakness induced by the Chinese Golden Week. The non-manufacturing PMI for March surprised me on the upside, though. Where I thought that the somewhat weaker trends in January and February were indications that the stricter monetary policies pursued over the past 12 months have started to bite, it seems to me that the PBoC needs to do more to slow the economy.

Sources: CFLP; Plexus Asset Management.

From a forecasting point of view the CFLP manufacturing PMI gives a better picture of underlying GDP growth due to lower seasonality. China’s year-on-year GDP growth of 9.8% in the last quarter of 2010 was in line with my estimate of 10% based on the manufacturing PMI’s trend in that quarter. It is evident to me that China’s year-on-year GDP growth in the first quarter is likely to come in at approximately 10%.

Sources: Dismal Scientist; Li & Fung; Plexus Asset Management.

Japanese economy: To get worse before recovering?

How the Japanese economy will perform over the next few quarters as a result of the disaster is virtually impossible to say. We will have to take our lead from the trend in the manufacturing and services PMIs. In the following graph I have assumed that the manufacturing PMIs for the next three months will come in as follows (March was 46.4): April 40; May 45; and June 50. In this scenario it seems to me that GDP growth in the first quarter will register approximately -1% on a quarter-on-quarter annualised basis. In the second quarter the GDP is likely to shrink by 2% to 3% on the same basis.

Sources: Dismal Scientist; Markit; Plexus Asset Management.

UK economy: Continuing to gain traction…

From my reading of the GDP-weighted PMI the UK grew by approximately 2.0% in the first quarter on a year-on-year basis compared to 1.6% in the fourth quarter of 2010. It is evident that growth in the second quarter will accelerate to approximately 2.5% to 3.0%, barring any fallout from the Japanese disaster.

Sources: Markit; Dismal Scientist; Plexus Asset Management.

Conclusion

While both global manufacturing and non-manufacturing/services PMI numbers continue to be relatively strong, the onset of a declining trend is something to watch closely. The population of black swans in the global pond has now been expanded by the terrible natural disaster in Japan. The geo-political situation in the Middle East and North Africa is not improving, lending support to higher oil prices and increasing price pressures in the global economy. The PBoC has again tightened its monetary policy. The potential contagion of the debt crisis in the Eurozone and the impact of austerity measures on the Eurozone economy are still major uncertainties. These black swans and how they will unfold are likely to influence and prescribe the policies of central bankers globally.

Tags: Asset Management, Brazil, China, Contraction, Emerging Economies, Eurozone, Global Growth, Gold, Hiccup, India, Ism, Kagiso, Mainland China, Management Sources, Manufacturing Sector, Manufacturing Sectors, Moderation, oil, Pmis, Rsa, Russia, Scorecard, Seasonal Factors, Second Consecutive Month, Tragic Events, Turnaround
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Emerging Markets Diary (July 12, 2010)

Wednesday, July 14th, 2010

Emerging Markets Diary (July 12, 2010)

Strengths

• China’s central bank indicated that its monetary policy would remain appropriate and accommodative in the second half of this year. In the past seven weeks, through open market operations, its net injection into the banking system reached RMB 938 billion, offsetting the effect of three reserve requirement hikes so far this year.
• Thailand’s consumer confidence rose for a second consecutive month to 69.1 in June from 67.6 in May, thanks to continued economic recovery and stabilizing political situation.
• Philippines’ consumer price index slowed for a second month to 3.9 percent year over year in June from 4.3 percent in May. The International Monetary Fund (IMF) raised its 2010 GDP forecast for Philippines to 6 percent from 3.6 percent estimated previously in April.
• May industrial production in Turkey registered a 15.6 percent increase year-over- year after posting a 17.3 percent increase in April. Production increase in export-oriented sectors, such as motor vehicles (26.0 percent year-over-year), textile (22.1 percent year-over-year), plastics (22.6 percent year-over-year), machinery (24.1 percent year-over-year), and electrical machinery (57.1 percent year-over-year) sectors, was the main culprit behind the sharp production increase.

Weaknesses

• China posted 1.04 million units in passenger car sales in June, representing a slowdown in year-over-year growth to 19.4 percent, a 14-month low, from May’s 25 percent and April’s 34 percent.
• Singapore’s manufacturing Purchasing Managers’ Index declined to 51.3 in June from 52.2 in May, reflecting a slowdown in global manufacturing orders and potentially softening economic expansion in the second half of this year.
• Both Malaysia and South Korea raised benchmark interest rates by 25 basis points to 2.75 percent and 2.25 percent, respectively, as a preemptive move to restore borrowing cost to a more appropriate level.
• Hungarians resorted to franc-denominated loans during the boom years last decade to escape high domestic interest rates. The surge in the Swiss franc, which has gained as much as 27 percent in the past year versus the forint, has deepened Hungary’s recession by as much as 2.5 percentage points, by Nomura Securities estimates. Hungarian government’s measure to ban mortgage contracts on foreign currency denominated loans effective from July will wipe out remaining retail lending activity in Swiss franc and euro.

Opportunities

• China will suspend all other initial public offerings (IPOs) in the domestic A Share market for one week to facilitate a decent trading debut of Agricultural Bank of China, fourth largest state owned bank in the country. The government’s market friendly behavior coincides with a historically close-to-extremely-oversold condition in domestic A Share stocks, which may continue to help improve sentiment towards Chinese companies traded in Hong Kong and the U.S.
• Turkish CPI dropped 0.56 percent in June and annual inflation eased to 8.4 percent from 9.1 percent, prompting Morgan Stanley to change their interest rate forecast call to no policy rate hikes in 2010. Continued low interest rate environment could potentially extend the rally in financials.

Threats

• Even though the resource tax China plans to impose for oil, natural gas, and coal in its western provinces is part of an effort to promote regional growth by strengthening local government coffers, this policy, with the potential to be expanded nationally, is likely to negatively affect profitability of upstream energy producers in China.
• Eastern European exports to Germany are largely semi-finished goods refined further for destinations outside the Eurpean Union, making them less prone to shifts in Europe’s largest economy. Weaker euro made finished export goods are more competitive with Czech Republic, Slovakia, and Hungary registering strong growth in industrial production in May.

Tags: Banking System, Basis Points, Borrowing Cost, Consumer Confidence, Consumer Price Index, Economic Expansion, Economic Recovery, Electrical Machinery, Emerging Markets, Gdp Forecast, Hungarians, International Monetary Fund, International Monetary Fund Imf, Natural Gas, Open Market Operations, Passenger Car Sales, Political Situation, Preemptive Move, Purchasing Managers Index, S Central, Second Consecutive Month, Seven Weeks
Posted in China, Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Diary (June 21, 2010)

Saturday, June 19th, 2010

Energy and Natural Resources Market Diary (June 21, 2010)

Strengths

• U.S. domestic steel mill utilization increased to 74.6 percent for the week ending June 12 versus 73.8 percent in the previous week. Quarter-to-date utilization has averaged 73 percent and year-to-date utilization 70.1 percent.
• U.S. industrial production rose by 1.2 percent month over month in May and is up 7.6 percent year over year. This was driven in part by strong output from utilities, although auto production also gained traction in the month, rising to an annualized rate of 8.02 million.
• China coal railings in January-May totaled 814 million metric tons, up 17.9 percent over the same period last year. Robust demand in downstream industries during those months and surging coal output contributed to the growth. Power consumption was up 22 percent year over year in January-May, and China coal output was up 20.6 percent.
• Natural gas futures prices gained 7 percent this week on forecasts of increased demand from hotter-than-normal weather and a reduction in the year-over-year inventory surplus.

Weaknesses

• Tokyo Steel Manufacturing, a large Japanese electric-furnace steel producer, reportedly cut prices by as much as 12 percent for July contracts, the first reduction in six months, as price competition with Asian mills intensified and costs fell.
• Copper imports by China declined for a second consecutive month in May amid ample domestic supplies and on prospects of weakening seasonal demand. The customs office said that shipments of copper and products were 396,712 metric tons in May. This is 9.1 percent below April’s 436,350 metric tons and 6.1 percent less than 422,670 metric tons a year earlier.

Opportunities

• Rio Tinto has announced that it will invest $469 million to build the Kennecott Eagle nickel and copper mine in Michigan’s Upper Peninsula. Construction of the mine will begin this year and should be complete by 2013.
• An expert from China’s National Development & Reform Commission has stated that the investment in high-speed railway construction will remain at around RMB 700 billion annually in each of the next five years, compared to RMB 600 billion in 2009, according to Antaike.

Threats

• The U.S. Army Corps of Engineers announced immediate suspension of the Nationwide Permit 21 program for surface coal mines in six states in the Appalachian region. The move is the latest step by U.S. authorities to crack down on mountain-top removal mining on concerns over the impact to valley streams and waterways.
• Interfax is reporting that the China State Council has announced that the government will not allow the construction of any new steel-making facilities before the end of 2011. Projects that received prior approval may proceed. It is estimated that China currently has the capacity to produce 700 million metric tons, with May data indicating production of 660 million metric tons on an annualized basis.

Tags: Auto Production, China, China Coal, Coal Output, Commodities, Copper Mine, Customs Office, Domestic Steel, Electric Furnace, energy, Gas Futures Prices, Kennecott, Market Diary, Million Metric Tons, Natural Gas, Natural Gas Futures, Natural Gas Futures Prices, Natural Resources, Power Consumption, Rio Tinto, Robust Demand, S Industrial, Seasonal Demand, Second Consecutive Month, Upper Peninsula
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Energy and Natural Resources Markets Diary (4/24/2010)

Saturday, April 24th, 2010

Energy and Natural Resources Market Diary (4/24/2010)

Strengths

• China’s copper imports rose for the second-consecutive month in March, up 53 percent from February to 337,125 tonnes.
• China’s coal imports more than doubled from a year ago to 15.2 million tonnes in March.
• China’s apparent oil demand in March climbed 12.8 percent from a year ago to 35.25 million tonnes or about 8.12 million barrels per day. However, oil demand fell below the all-time high of 8.5 million barrels per day Platts estimated for February.
• In the International Monetary Fund’s (IMF) latest Economic Outlook report, large investment flows into commodity related assets approached $257 billion in 2009, slightly below the all-time peak set in 2008. Despite these inflows, the IMF stated that there remains little evidence that financial investment has had a significant or sustained impact on commodity prices rising above fundamentals.
• Posco said it will raise steel product prices by as much as 25% starting May 3 to reflect higher costs for iron ore and coal.
• The World Steel Association released March production data, with the sector exhibiting further strong performance in the month. Total crude steel production was 1,418 million tonnes on an annualized basis, up 0.5 percent month-over-month and 30.7 percent compared to a year ago.

Weaknesses

• India’s iron ore exports fell by 3 percent year-over-year to 13 million tonnes in February, according to the Federation of Indian Mineral Industries. This was the third-consecutive decline and occurred despite strong demand from China, the main export market for Indian iron ore.

Opportunities

• Ukraine has agreed to new terms for gas supply from Russia, cutting the gas price by 30 percent to $200 per cubic meter in return for economic and political concessions. These include a 25 to 30 year extension for Russia’s Black Sea Fleet to remain in Sevastopol beyond the current 2017 lease expiry.
• China said this past week it had signed a framework financing deal with Venezuela worth about $20 billion. About half of that would be in China’s own yuan currency.
• China’s tight hold on the world’s usable supply of so-called rare-earth elements is posing a challenge for the fledgling green car industry. Carmakers are seeking new supplies outside China and testing scenarios of making the cars without rare earths. Hybrid and electric vehicles need more of these metals than most other types of cars and China supplies 95 percent of the world’s rare-earth elements.

Threats

• Eleven people were still missing after an explosion and fire hit Transocean’s Deepwater Horizon rig being operated under lease to BP in the Gulf of Mexico. The offshore drilling unit burned and eventually sank. Transocean’s VP for safety said that the rig had completed cementing and casing of an 18,000 foot exploratory well when there was an abnormal pressure build up and that while the incident resembled a blow-out it was too early to tell.
• The U.S. Commerce Department will make a preliminary decision whether to impose punitive tariffs on aluminum product imports from China only if the International Trade Commission determines that the increase in imports during the years has harmed US manufacturers.
• The National Energy Administration, China’s top energy body, said that China may begin to cut imports of coal in April because of rising global prices. Coal fuels about 80 percent of the country’s power plants and coal demand in the second quarter tends to fall because of lower use of air conditioning.
• Ecuador is preparing a law that will allow it to nationalize operations of oil companies in the country unless they sign contracts aimed at increasing state control over the sector, President Rafael Correa said in an interview this week.

Tags: China, Coal Imports, Commodities, commodities update, Crude Steel Production, Cubic Meter, energy, Financial Investment, India, Indian Iron Ore, International Monetary Fund, Investment Flows, Iron Ore Exports, Main Export Market, Market Diary, Mineral Industries, Natural Gas, Natural Resources, Oil Demand, Posco, Russia, Sea Fleet, Second Consecutive Month, Sevastopol, Steel Association, Steel Product, Time Peak, World Steel
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Rebecca Wilder’s economic updates (April 16 – 23): Expected to slide through 2009

Sunday, April 26th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

Today’s weekly reports are slightly more positive than last week. However, I avoided the trade reports all together, which undoubtedly would have dragged down the sentiment. Although there are a growing number of positive reports out there, global economies are still very much in the red zone, -1.3% in 2009 according to the IMF.

China’s retail sales rebound in March

China’s retail sales grew 14.7% in March 2009. Much of the draw on retail sales, measured in current prices, has been driven down by the slowing – now negative – rate of inflation (see next chart); however, weak demand surely played its part as well. The March rebound is one of the numerous pointing to a bottom in the Chinese recession.

Inflation continues to fall; some areas go negative

Inflation around the world is low and going negative in some areas (China). This is primarily an energy story, since core inflation, growth in all prices except food and energy, in Canada and the Eurozone are still rising at a 2% and 1.5%, respectively. However, prices move at a lag, and eventually weak demand will drag down core inflation as well.

According to some measures, home value in the UK and US are stabilizing

In April, UK home values grew for the third consecutive month, slowing the annual rate of decline to -7.3%. In another report across the Atlantic, February US home values grew for the second consecutive month, slowing the annual decline to -6.5%. Amazingly, this gain in US home prices was not widely reported in the media. I’ll take this as good news, but this is just two data points; and there are lots of reasons to think that home values will fall further (like the inventory of existing homes is still very elevated).

The FHFA index (this week’s report) shows price movements on homes tied to conforming loans guaranteed by Fannie Mae and Freddie Mac. Therefore, it is missing much of the market tied to non-conforming loans; the S&P Case-Shiller index is thought to capture better the housing market as a whole since it includes homes tied to non-conforming loans. See this WSJ article for a broad description of the two indices. I imagine the true price is somewhere in between the two.

The Bank of Canada reaches its “effective” lower bound

The Bank of Canada lowered its policy rate (the overnight rate) to just 0.25%, joining the near-zero lower bound club. The policy announcement reported that “the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual.” The Wall Street Journal discusses the Bank of Canada’s unprecedented statement that “the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

Policy, Policy, Policy. That is what this cycle is all about. From China to the U.S., and everywhere in between, central banks are pushing hard and governments are spending. However, in spite of the positive policy shifts, the IMF released this week its World Economic Outlook, where world growth, measured using purchasing-power parity (PPP) weights, is expected to contract 1.3% in 2009. If I had to choose, I’d go with the World Bank’s forecast, which is -0.6% in 2009 on a PPP basis.

Source: Rebecca Wilder, News N Economics, April 23, 2009.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Canadian Market, Conforming Loans, Core Inflation, Economic Updates, Energy Story, Eurozone, Fannie Mae, Global Economies, Home Value, Home Values, Imf, Negative Inflation, Rate Of Inflation, Rebecca, Rebound, Recession, Red Zone, Retail Sales, Second Consecutive Month, Sentiment, Zone 1
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China: Signs of a recovery – already?

Saturday, April 4th, 2009

This post is a guest contribution by James Pressler* of Northern Trust Company.

We are just over six months into this global financial crisis, and most major economies have yet to get back on their feet. Yet somehow, the numbers coming out of Beijing suggest that the Chinese economy has already dusted itself off and is preparing to take off at a dramatic pace. Is such a quick recovery possible, and if so, how do other countries get in on it?

Our first piece of evidence is found within today’s PMI release for March. Given the particular survey methodology behind this index, we do not give the PMI significant attention, although it does carry weight in the markets at large. The overall PMI rose above the breakeven line of 50, and new orders broke above the line for the second consecutive month. These numbers suggest that the manufacturing sector of the economy was in contraction for about five months and below its usual pace for about nine months. Considering the wealth of anecdotal discussion of widespread shutdowns and mass layoffs, it seems odd to think that the worst has passed.

It also seems odd to see that another key category of the overall PMI – export orders – is doing surprisingly well. While neither the export orders index nor the imports index has crossed above 50, they both have come back from horrible droughts and appear set to break the line in April. Again, this is reassuring to see, but it does seem odd that this same kind of turnaround has not been witnessed in China’s main trading partners. For all the energy of China’s export recovery, few countries are showing any increased import demand these days, and those countries that supply China with economic inputs have not been bragging about a recovery in sales.

One indicator that we do pay particular attention to is bank credit, and several sources in Beijing suggest that lending has been dramatic through Q1. The People’s Bank of China (PBoC) reports that lending has spiked since November, with the main indicators exceeding the 17% rate officials are comfortable with. This growth is driven primarily by the government’s fiscal stimulus drive and its call for banks to lend more vigorously to offset the economic slowdown. From this perspective it is difficult to argue against the figures, and we recognize that plenty of entities will be putting large amounts of yuan to work in the coming months.

Our main concern for the near-term, however, focuses on how these funds will be put to use. The Chinese banking system has been improving its balance sheets over the past few months, but a significant amount of non-performing loans and ‘special mention’ loans still weigh on the sector’s ability to generate credit. If this wild growth in credit generation does not ignite self-sustaining economic activity, there is every chance that today’s big loans could become tomorrow’s burdens. For now we remain cautious – more so than the rallying Asian markets – and wait for more signals that can either confirm or refute all this economic activity.

Source: James Pressler, Northern Trust – Daily Global Commentary, April 2, 2009.

*James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.

Tags: Array, Bank Of China, China Signs, Chinese Economy, Contraction, Dramatic Pace, Droughts, Export Orders, Export Recovery, Global Financial Crisis, Import Demand, James Pressler, Manufacturing Sector, Mass Layoffs, Northern Trust Company, Pboc, Pmi, Second Consecutive Month, Shutdowns, Supply China, Survey Methodology
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