Chinese factory activity contracts for fifth straight month

HSBC Chinese flash manufacturing PMI has indicated contraction for a fifth consecutive month, slipping to 48.1 in March from 48.5 in February and missing consensus of 48.7.

New orders, employment and output shrank, although new export orders grew for the first time in four months.

The reading adds to other data which indicate that China's economy is slowing.

"Weakness is broadly based with domestic demand softening further," says HSBC. "We expect Beijing to launch a series of policy measures to stabilize growth."

Hopes of such stimulus have helped push the Shanghai Composite up 1%, while the Hang Seng is +1.7%. (PR)


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Comments (6)
  • bbro
    , contributor
    Comments (11227) | Send Message
    China has $3.7 trillion in foreign exchange reserves,Japan 1.3 trillion,Eurozone .8
    trillion,Saudi Arabia .7 and United States .15.
    24 Mar 2014, 03:05 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1863) | Send Message
    China's central bank has printed far more money than the Federal Reserve, the Bank of Japan, and the Bank of England, combined. They have converted much of the renminbi into low-yielding US Treasuries to be held as foreign currency reserves far in excess of their needs. Some fail to realize that this asset is offset by a liability on the PBOCs balance sheet.


    This is just another example of the capital misallocations that the Chinese government [the PBoC is not independent] has become known for.
    24 Mar 2014, 10:07 AM Reply Like
  • samuel_liu
    , contributor
    Comments (2753) | Send Message
    Dear Mike:


    I'm puzzled, aren't US Treasuries bought from its trade surplus of US$s overflowing.


    Or are you saying that its US Treasuries are bought with its excessively printed CNY. I thought the Govt was looking useful places for that like the CNH market, lending for commercial projects ...
    24 Mar 2014, 10:13 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1863) | Send Message
    Sam, the first thing to note is that, theoretically at least, China's trade surplus results from sales by businesses, not from sales by the government or the PBoC. The businesses may want to repatriate their sales proceeds denominated in a foreign currency. To do so, it would be necessary for the PBoC to print renminbi that they could issue to the businesses in exchange for their foreign currency.


    Chinese businesses would also import goods from other countries that may be denominated in foreign currencies. The foreign currency received from exports could be used to pay for those imports denominated in foreign currency.


    If China runs a trade surplus, the PBoC may need to maintain some foreign currency reserves that can be drawn upon to cover the mismatch. Foreign currency reserves in excess of this amount are largely unnecessary. I don't believe China has ever had a $3.7 trillion trade surplus.


    But, in order to prevent its currency from appreciating against foreign currencies which could make its exports less competitive, the PBoC has not only allowed Fx reserves accumulated from trade surpluses to accumulate, it has also printed large amounts of renminbi that it then uses to buy low-yielding US Treasuries.


    The US Treasuries purchased appear as an asset of the PBoC, but to tap those Fx reserves the PBoC would have to offer renminbi in exchange. The requirement to exchange renminbi for the Fx reserves therefore represents an offsetting liability.


    There is an opportunity cost associated with allocating so much capital to low-yielding Treasuries. The PBoC has attempted to reduce this somewhat through the creation of SAFE, a sovereign wealth fund authorized to invest in riskier assets that may generate higher returns, but this is a relatively small amount compared to China's $3.7 trillion Fx Reserves.


    This opportunity cost is also minimized by the fact that banks can obtain funds at low, government-regulated interest rates on deposits from individuals who, until recently, directed 80% of their savings into bank accounts because:


    - they don't trust the Chinese stock markets;


    - they're unable or unwilling to finance speculative investments in already high priced real estate in urban areas where real estate ownership is allowed; and


    - opportunities for those without connections to sufficiently high-ranking members of the CCP ["guanxi"] to start businesses is limited.


    The advent of high-yield wealth management products, as well as mobile banking offered by cash-rich internet companies who then lend funds to liquidity starved banks at much higher inter-bank interest rates, has temporarily diverted trillions of renminbi away from these bank deposits. And, 10% to 20% interest rates on high-yield money market accounts used to finance long-term investments by local government officials and real estate developers with few other alternative sources of funds also seems to have attracted hot money from outside the country, despite China's strict capital controls. One way of sneaking this money into the country is to "pad" invoices for exports.


    The fact that China's longer-term objective is for the Fx value of the renminbi to gradually rise also made some speculators confident that the low interest rates at which they are able to borrow elsewhere would effectively be reduced by appreciation in the value of the renminbi. Concerned that the availability of these portfolio investment inflows will limit their ability to rein in out of control Fixed Asset Investment spending that has contributed to heightened concerns about asset bubbles and their impact on the health of China's banking system, the PBoC has attempted to curtail these hot money inflows by widening the trading band for the renminbi. But, this may be short lived since the PBoC is confronted with many competing challenges, some of which require more liquidity and some less, and the PBoC has few other available tools at its disposal to address these conflicting concerns. This may explain why the PBoC has chosen to widen the trading band, rather than seeking a more consistent direction for Fx rates.
    24 Mar 2014, 12:28 PM Reply Like
  • june1234
    , contributor
    Comments (4412) | Send Message
    Its not complicated. Fed tightening will have an impact on EM's who, as worlds growing economies, borrowed HEAVILY (all caps) when the Fed loosened. And China's as everyone knows is the biggest one
    24 Mar 2014, 10:45 AM Reply Like
  • Mike Holt
    , contributor
    Comments (1863) | Send Message
    Not so fast june 1234: I think it would be a mistake to focus so myopically on potential actions to be taken by the Fed. Many other central banks around the world have also been implementing lax monetary policies, and the amount of money printed by the PBoC alone dwarfs the amount that the Fed has attempted to print.


    And, the Japanese Yen has fallen relative to the US dollar because their QE program was just as large as, and more effective than, the Fed's QE3 program. In fact, this may have caused Japanese exports to become more competitive relative to Chinese exports, and that, in turn, may help to explain why Chinese exports, and manufacturing activity, seems to have been under pressure lately -- if you can sift through all the distorted economic data.
    24 Mar 2014, 12:40 PM Reply Like
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