One of the key rationales for rising stock markets earlier this year was the hope that China was over the worst. In particular, rising Purchasing Managers’ Indices relating to China’s manufacturing were on the up. “Phew!” said the markets, and went out and bought.

The latest flash Purchasing Managers’ Index (PMI) from HSBC and Markit was out this morning, and it was disappointing.

Okay, just remember this: it was just a flash reading, meaning it was an early estimate. The fuller version will be out on 1 May. Also bear in mind any score over 50 is meant to correspond with growth.

This morning’s flash PMI stood at 50.5, from a reading of 51.6 from the full PMI of last month.

But the fall was consistent with other data. Capital Economics, for example, keeps its own index monitoring China, which takes into account a fairly wide assortment of indicators, such as electricity usage. This index – what Capital Economics calls its China Activity Proxy (CAP) – has also fallen sharply and is now consistent with growth of just 6.5 per cent, which is quite a lot short of the 7.5 per cent official estimate.

China’s challenges are not new. Mounting local government debt, a housing bubble, over-investment, and not enough consumption are all working against China.
The short term fix is for the government to stimulate the economy. Everyone knows what the long term fix is –to get consumers to spend more.

According to James Kynge, writing in today’s ‘FT’, the change is occurring as workers who migrated from the country to cities are turning into consumers. He said: “Migrants born into the relative plenty of the 1990s are considerably more spendthrift than those born in the 1980s and 1970s, spending 53 per cent of their incomes, compared with 47.2 per cent and 38.3 per cent respectively.”

But the transfer from investment led to consumer led was never going to be easy. China may pull it off, but if it can do so without suffering major shocks in the transformation period, it will either be a miracle, or a testament to extraordinarily good judgement by China’s leaders.

© Investment & Business News 2013