CHINA’S FALTERING EXPORTS

CHINA'S LOPSIDED BALANCING ACT

John Lee

Business Spectator, November 24, 2011

Over the weekend the Chinese vice-premier, Wang Qishan, who is responsible for overseeing the country’s financial sector predicted that the global economy could slump into a long-term recession, and urged China to speed up reforms to cope with any possible fallout. Wang would have known ahead of time what the HSBC Purchasing Managers Index (PMI) revealed on Wednesday – namely the lowest recording of industrial activity over the month of November for almost three years. In response, the Australian all ordinaries index fell 1.86 per cent, while share prices for mining giants BHP Billiton and Rio Tinto fell 3.05 per cent and 3.41 per cent respectively.

Given that 23 cents in every dollar worth of our exports goes to China, the local sharemarket response is predictable. But Australian investors, who generally invest for the short- or medium-term, are getting it wrong and displaying a worrying lack of understanding as to how the Chinese political economy actually works. In fact, the data coming out of China over the past week ought to delight all but the longer-term investors in our big miners.

The November PMI figure of 48 indicates that industrial activity has actually shrunk since a figure of 50 represents stagnation. The index is derived from responses from surveys sent to around 400 executives of manufacturing companies. It is important to realise that the companies surveyed consist overwhelmingly of foreign-invested or foreign-owned export manufacturers in China. If we examine the PMI figures since 2004, the index’s correlation with the demand for Chinese exports in the major global consumer markets of the European Union and the United States is almost perfect. Therefore, the disappointing PMI figure for November tells us what we already know – that demand for Chinese exports in the industrialised world is faltering, especially in the EU.

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