China’s Lunar New Year holiday has been mentioned by official Chinese agencies and many economists as the principal cause for some recent weaker economic data such as house sales and the manufacturing PMI. However, a closer analysis and other sources point to real weaknesses developing in the Chinese economy (see my Feb. 14 post CHINA’S INFLATION FIGHT THREATENS ECONOMY).
The latest example is the services PMI. China’s official CFLP claims that the sharp contraction in its February’s non-manufacturing PMI is essentially due to the holiday.
China’s non-manufacturing industries contracted in February for the first time in a year because of the week-long Lunar New Year holiday.
The Non-Manufacturing Purchasing Managers’ Index (PMI) dropped to44.1 from 56.4 in January, the China Federation of Logistics and Purchasing said on its website on Thursday, falling below the 50 level that divides expansion and contraction.
"The pullback is mainly due to seasonal factors," Cai Jin, vice-president of the logistics federation, said in a statement. "Excluding that, the momentum of the indicator is still running at its normal trend." The gauge published by the federation also dropped below 50 in February last year.
Markit HSBC published its own, seasonally adjusted, services PMI for China yesterday, qualifying the trend as "lackluster growth."
Posting 51.9 in February, down slightly from 52.0 in the previous month, the seasonally adjusted HSBC Business Activity Index was at a level indicative of only a modest rate of activity growth in China’s service sector.
New business received by Chinese service providers rose further in February. However, the rate of growth eased for the sixth successive month to the third-lowest in the series history. This, combined with a weaker expansion in manufacturing new orders, meant that growth of private sector new business weakened to the lowest since July 2010.
Markit’s China Composite Output Index, which combines manufacturing and non-manufacturing activity, fell significantly from 54.6 to 51.9 in February, seasonally adjusted. The composite index also declined sharply in early 2010 before rebounding but recall that stimulus measures were still present then. The current situation is much different as the PBoC and the government are seriously fighting inflation.
(Click to enlarge)
And the fight against inflation is far from over. The Markit survey reveals that cost pressures are still very strong and that businesses are not shy of passing them on to their clients. Core inflation is thus likely to keep rising in China.
Output prices set by service providers rose again in February, with the pace of inflation quickening to the sharpest for a year. Similarly, output prices rose at an accelerated rate at the composite level, as charge inflation at manufacturers’ factory gates quickened to a three-month high.
Respondents to both the services and manufacturing PMI surveysmentioned passing on higher costs to customers through increased output charges. February data pointed to another marked rise in average input costs faced by Chinese service sector firms.
However, the rate of cost inflation was much stronger in the manufacturing sector, where purchase prices rose at the fastest rate since last November Consequently, the overall rate of cost inflation quickened to a three-month high in February.
One way to alleviate inflation problems is to "accept" higher inflation. Li Zhaoxing, the spokesman for the National People’s Congress, China’s top legislature, said on Friday that China may set the inflation target for 2011 at around 4% from 3% in 2010. As a Chinese proverb says: "One may tolerate a bulging carpet, one could still trip on it."
Coming back to the official services PMI survey, it should be noted that the February 2010 reading was 46.4, down 8.7 points from 55.1 in January. The non-seasonally adjusted figure for February 2011 is thus 2.3 points lower than last year, 12.3 points below its January 2011 level and, at 44.1 is a mere 2.2 points above the index all time low of 41.9 reached in February 2009. That certainly does not sound like an indicator that "is still running at its normal trend" as the official statement asserts.
Lastly, the official survey notes that
(…) the sub-index for consumption-related businesses dropped to 46.5 in February from 62.6 the previous month. The gauge for new property orders declined to 39.7 in February from 42 in January, the fifth monthly decline, the federation said.
Seasonal factors or not, that sounds weak to me.
滞涨 (stagflation in Chinese).