Chart of the Week: China’s recent slide seems to be bottoming out

China’s official purchasing managers’ index (PMI), which captures monthly changes in business activity in the manufacturing sector, increased to 50.2 in September, up from 49.7 in the previous month. A number above 50 indicates growth rather than contraction. On the surface, this is good news for China, after five consecutive months of readings below the 50 threshold. However, Caixin’s measure of China’s manufacturing PMI paints a less optimistic picture, with a reading of 50.6 but moving in the opposite direction from the official index, decreasing from 51.0 in the previous month. According to Caixin, although the production sub-component expanded at the highest rate in four months, the fall in the aggregate manufacturing PMI is due to decreased demand for exports and a drop in employment in Chinese manufacturing plants. Furthermore, factory owners’ confidence for the next year was at its lowest level in 12 months, and input costs increased. There are multiple reasons that could explain the difference between the two indices. While the official index captures large and mostly state-owned enterprises, Caixin captures small and medium-sized enterprises that are export-orientated, largely located on the east coast of China. Caixin’s index is based on a sample of 650 companies, whereas the official numbers are based on a larger sample of 3200 companies. Therefore, to the extent that we can garner insight from these indices, Caixin can be considered a better measure of the conditions facing the external sector in China (seesawing just above the 50 threshold), while official PMIs are better at gauging domestic conditions (recovering). All told, with both measures indicating growth, this is good news for China, as the economy finally seems to be bottoming out after several months of very weak economic data, lending further support to Fathom’s view that China’s economy is likely to avoid an outright recession in the remainder of this year. However, as long as troubles continue in China’s property market, Fathom expects slow growth to persist.

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