An increasingly elusive economic recovery for China is going to take a little longer, according to early indicators for September.
HSBC's flash purchasing managers' index for September, released this morning, has risen ever so slightly to 47.8, an 11th straight month of contraction but bettering August's 47.6.
However its flash manufacturing output index has hit a 10-month low of 47, down from 48.2 in August. It all suggests that while a weak recovery is possible for this year's last quarter, the manufacturing industry is not yet out of the woods.
"China's manufacturing growth is still slowing, but the pace of slowdown is stabilizing. Manufacturing activities remain lacklustre, thanks to weak new business flows and a longer than expected destocking process. And this is adding more pressures to the labour market and has prompted Beijing to step up easing over the past weeks. The recent easing measures should be working to lead to a modest improvement from 4Q onwards," wrote HSBC's chief economist for China, Qu Hongbin, in a note accompanying the monthly indicator's release.
The HSBC findings show new orders, new export orders, employment and work backlogs are all still contracting but at a slower rate, and stocks of finished goods are accumulating more slowly.
"I don't think there's much more downside. I think these producers are reaching the point where their production is meeting demand. I don't see them cutting production much more," said Alaistair Chan, an economist on the Asia desk at Moody's Analytics.
China's policy makers have stuck with a policy of fine-tuning their way back to economic health, using a combination of interest rate cuts, reductions in banks' reserve requirements, and some modest stimulus spending. A much-touted infrastructure spending package of nearly 1 trillion yuan ($157-billion U.S.) for highways, ports and airports, published by the National Development and Reform Commission earlier this month, has been embraced in some corners but dismissed in others as mainly for show, as it includes some recycled projects spread over many years.
The country's premier, Wen Jiabao, said this month they are on track to meet an official GDP growth target of 7.5 per cent, though suggested the country would not hesitate to launch more stimulus spending if required.
What is clear is that slowing demand for China's exports from struggling Europe and North America is having a serious and lasting impact on the Chinese economy. Analysts who might have committed the sin of underestimating that impact found themselves roundly scolded by Frederick W. Smith, the CEO and president of Federal Express, this week, as he defended his company's lowered profit expectations during an earnings call. FedEx is seen as an economic bellwether for its reflection of global shipping trends.
"The locomotive that has driven China's growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate, contrary to everybody's hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted – grown at a far lesser rate or, in the case of certain European countries, have contracted – that's reflected in the numbers in China," Mr. Smith said.
"And you can't escape that. I've been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy."