It’s been a horrid 24 hours for blue chip miners. Share prices of both BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] have taken a hammering.
BHP shares fell 4% to $22.90 at 1:30pm AEST. Rio was down 3% to $47.86.
The selloffs came after the Asian Development Bank revised down China’s growth forecasts. It now expects China to grow at 6.8% in 2015, down from 7.2% previously.
That was bad enough alone. But markets still had Chinese manufacturing data to sift through today. At midday, the news started trickling through. And that news was far worse than anticipated.
The Caixin Flash Purchasing Managers Index (PMI) fell to 47.0 in September. That was down from 47.3 in August. Markets expected the index to rise to 47.5 this month. Instead, the index is now at its lowest point since March 2009.
These figures are a roundabout way of saying the situation is getting worse. Anything below 50.0 on the index indicates contracting factory activity. The Caixin PMI has sat below 50.0 since March. In other words, Chinese manufacturing has contracted for six months straight.
This is how Caixin framed it:
‘The decline indicates the nation’s manufacturing industry has reached a crucial stage in the structural transformation process. Over, the fundamentals are good. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices.
‘Fiscal expenditures surged in August, pointing to strong government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilisation to demonstrate their effectiveness’.
Most measures were down across the board. Output decreased. New orders and export orders fell. Employment rose. Output and input decreased. And yet Caixin is urging patience?
The ‘policies’ it’s referring to have already had plenty of time to work. The past year has seen China flood the economy with capital. Since November 2014, the People’s Bank of China (PBoC) has slashed rates six times. Interest rates have dropped by a whole percentage point to 4.60%. The latest of these cuts came in August.
At the same time, reserve capital requirements were lowered. That freed up banks to pump more money into the system.
Of course, it’s true the Chinese have scope to ease further. Both on a monetary and fiscal level. But if previous measures were effective, we’d see it by now. Instead of falling factory activity, we’d be seeing something else. If not a rise, then at least some stability.
That’s proving elusive. And it paints even more doubt, if any was needed, about China’s economy.
Chinese consumption not enough to hit 7% growth
China is the world’s second largest consumer market. It’s worth about US$3.3 trillion. It’s second only to the United States. The US consumer market is valued at US$11.4 trillion. The US makes up a quarter of the world’s entire consumer base. It comprises 71% of GDP, compared to 37% for China.
Australia, by comparison, falls much farther down the list. Our consumer market is valued at US$850 billion.
The great hope is that China’s will catch up with US consumerism in time. At 37% of GDP, it has a long way to go to match the US.
On the upside, signs indicate this shift is taking place. China’s seeing rising demand in services and consumption. But until this outpaces declines in exports, it won’t dispel fears over its economy.
China needs consumerism to rise faster than it is. Which leaves China with only one option available to it.
China will require more of everything. More cuts, more easing, more stimulus. And it will need this using both fiscal and monetary tools. That’s the only way it can slow the rate of decline in its exporting sector, and lift consumerism.
The Chinese President, Xi Jinping, confirmed as much:
‘China has the capacity and is in the position to maintain a medium-high growth in the years to come. The Chinese economy is still operating within the proper range’.
That may be so, but Chinese policymakers were confident of 7% growth this year. Even they’re realising this is becoming unlikely.
To be sure, growth rates of 6.8% are impressive by global standards. Australia can only dream of such a thing. The developed world is more familiar with growth of 2–3% by comparison.
But the pressure is bigger when it comes to China. Slowing growth isn’t good enough in a world relying on China. For the better part of a decade, China was the engine of global growth. It was the key driver among a band of emerging markets with fast growing economies.
Now both developed and developing markets are slowing. But all China can do is what every economy has done up to now. It lowers rates, and kicks the can down the road. It’s the easiest, and safest option. Especially when the Chinese government has to worry about social unrest.
Which means the great unwind will continue.
We can expect further rate cuts. Further currency devaluations. More lending relaxation. More hands on government spending.
How far interest rates fall is anyone’s guess. Especially when you see negative interest rates across the developed world, at levels that have no impact on the real economy anymore.
China’s next move
Falling factory activity is proof that global demand is slowing. It’s not just a matter of export competitiveness. Activity is dropping because, globally, consumers aren’t buying as much. It means that China can’t export its way out of trouble. Cheaper exports can help, but only to a point. Especially considering every economy is playing the same game.
Policymakers know this. So they’ll hope monetary easing achieves another aim altogether.
As new capital floods the economy, it will filter through to domestic consumption. This won’t help China hit growth targets of 7%. Again, that’s because of the weighted importance of exports to China’s GDP growth. But at least China could point to rising consumer confidence. That might be enough to keep the bears off its back for a while.
After all, it wouldn’t be the first economy to using consumption, funded by cheap credit, as a way of masking over deeper problems. Now if only policymakers could prevent manufacturing data from coming out every month…
Contributor, Markets and Money
PS: The Aussie share market had its worst month since 2008 in August. The ASX lost 9% of its value, shedding more than $70 billion.
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