Fitch Seeks to Explain China's Differing PMI Results
The divergence between the official version of China’s manufacturing purchasing managers index (PMI) and the rival HSBC index is baffling investors about the current state of the market and the outlook for corporates in China, says Fitch. The credit reference agency (CRA) believes the difference may be explained, however, by the tighter credit conditions facing China’s private sector companies in contrast to the state-owned entities.
According to the official government index of China’s PMI, manufacturing activity continued to expand in April 2012 with the index reaching a 13-month high of 53.3 from 53.1 in March. However, the HSBC index remained below 50, which signals a contraction, at 49.3 in April, although this was an improvement from 48.3 seen in March.
For nine out of the past 10 months HSBC has shown a contracting economy, whereas the government figure has remained above the important 50-level, only dipping below in November 2011 but then expanding again in the last five months.
Fitch notes the official PMI figure reflects positive returns from large state-owned enterprises in particular, whereas the HSBC index covers only private sector entities excluding the large number of public sector entities. The divergence of the indicators may reflect differential terms of access to credit, with the contracting HSBC index representing the tighter credit conditions for private companies whereas the expanding official index reflects China’s large state-owned entities, which enjoy support for growth and expansion and have easier access to funding.
The official version appears to be in line with recent news that China’s daily output of crude steel increased to a record 2.03 million tonnes during the first 10 days of April. This follows China’s record monthly steel production of 61.58 million tonnes in March.
The HSBC figure for China’s PMI looks to be more in line with South Korea’s 4.7% year-on-year fall in exports in April, which marked its second consecutive monthly drop. Korean government officials explained that a slowing Chinese economy along with Europe’s deepening recession and the weaker Japanese yen all currently pose downside risks for Korean exports.
Fitch says that its view is that the divergent indices reflect the conditions prevailing for many private sector entities in the current economic climate in China, compared to those conditions for the many state sponsored entities. This is perhaps not surprising from a credit perspective when considering a centrally directed economy trying to integrate a growing capitalist business sector.