China Manufacturing PMI Numbers Lift Base Metal Prices

Commodity prices, and in particular base metal prices, have risen in recent weeks helped by news of improving PMI numbers feeding a sense of optimism that the Chinese economy has turned from seven straight quarters of slowing growth.

Should we join the growing optimism club or do we pursue a strategy of "trust but verify?" A recent article explores more of the detail and looks at both the official National Bureau of Statistics (NBS) survey and the HSBC Purchasing Managers Survey (PMI) in an effort to better understand the upturn. The final reading (last month’s PMI number was a preliminary result) came in at 50.5 for November, up from 49.5 for October suggesting the economy returned to a positive expansion phase.

Point for state-owned entities
The official NBS PMI supported this as it rose to a seven-month high of 50.6 for November, from 50.2 in October. However as the article points out, the HSBC survey tends to focus more on the private sector whereas the NBS survey leans more toward the larger state corporation sector. Growth accelerated for large firms for the third month in a row. Medium and smaller companies, however, saw a retrenchment with the decline more pronounced for the smallest firms. An official PMI survey of China’s non-manufacturing sectors also ticked up to 55.6 in November from 55.5 in October, led by expanded activity in construction services.

But growth in air and rail transport and food and beverages both slowed. According to Dong Xian’an, an economist with Peking First Advisory, “The improving numbers are mostly because of government investment. From the second quarter the government has unleashed a lot of projects, and that has started to be felt in the economy, but it’s not a very healthy recovery yet,” he added. More investment led growth especially by the state sector appears "off-strategy" particularly since China needs to re-balance its economy toward greater domestic consumption and private sector growth.

Credit tough to come by
Smaller and private firms still plead for greater access to credit and investment incentives. These have gone disproportionately to the state sector, particularly since the financial crisis of 2008-2009. Output, new orders and new export orders all improved, the article explains, but a sub-index tracking employment deteriorated. Private firms generally account for more new jobs than the state sector explaining the rise in activity but the deterioration in employment.

Although we can all welcome an upturn in PMI numbers if it means the economy has improved, we find it disturbing if this growth has come at the expense of the private sector. More growth led by state controlled behemoths China does not need – particularly if done via the starvation of credit for small to medium sized enterprises. Not that base metal prices will worry overly much in either case so long as its growth occurs.

by Stuart Burns