Chinese PMI Pluralism

Includes: FXI
by: Wall Street Strategies

By David Urani

When we looked at the market Monday, a lot of the biggest losers were China related because of that soft manufacturing PMI reading from HSBC. Clearly that was a big driver of the global market purge. And certainly it's more reason to worry, because if you are to believe what the HSBC has been saying, then it means Chinese manufacturing has been contracting for six months straight. Not only does it reflect deceleration domestically in China, but it also reflects weakening trade with Europe and perhaps to a lesser extent the US as those economies decline (or in our case level off).

But I'm not throwing in the towel yet because as we know there are two major Chinese manufacturing readings, one from HSBC and the other from the government. As we noted last month, the results diverged big-time between the two indices which had us scratching our heads. Looking into it further, there are a couple of reasons that HSBC might underperform the official reading. The main difference seems to be that HSBC covers more small and medium sized businesses and those are affected differently than the big companies that the official index focuses on. Not only are tighter lending conditions more restrictive to less resourceful companies, but a higher percentage of those smaller businesses may also be reliant on exports than the larger ones.

That's not to say that the official reading doesn't have its drawbacks, either. As we've said before, you may have to think twice about what you believe out of the government as they have been known to twist what they tell the public. So in the end, perhaps both indices have issues. But I think that there's a good chance the official reading next week stays in the plus column (above 50). I get the feeling the truth may be somewhere in between. We could say that whatever the case, the Chinese situation isn't encouraging, but it may at least be a little better than Monday's data suggests.

About this article:

Tagged: , , China
Problem with this article? Please tell us. Disagree with this article? .