Chinese Manufacturing Data May Signal Bottom in Economy

Chinese manufacturing data worsened marginally in July. The National Bureau of Statistics in China reported that the official Manufacturing PMI fell in July to 50.1 from 50.2 in June. Some see this report as a glimpse of hope for the nation. Specifically, this data could signal that the slowdown in China is nearing a conclusion.

Further, the HSBC Manufacturing PMI, a private measure of output, indicated that the contraction in the manufacturing sector eased in July. The PMI rose from 48.2 in June to 49.5 in July, showing renewed strength in the sector. China's export-driven economy has slowed in recent months as its largest trading partner, the European Union (EU), faces debt woes. However, the official PMI's slowing decline and the HSBC PMI's monthly rise might be positive signals for both China and the EU.

Economists at Credit Suisse argue that the overnight data indicate that the Chinese economy is stabilizing at current levels. These economists argue that the continued fall in the New Orders sub-index, the fall in the finished goods sub-index, and the export orders sub-index all indicate that the troubles in China can be attributed to foreign pressures on global trade and a potential major stock liquidation in downstream industries.

Also, in light of the PMI data, the Credit Suisse economists predict further easing efforts from China. They note, "we look for two more rate cuts of 25 [basis points] over the next two quarters, and expect the [Reserve Requirement Ratio] to be cut by 50 [basis points] each time in the next three quarters." In addition, the economists note that the new-found positive rhetoric from Beijing is a positive for the economy. Earlier this year, the authorities warned that a slowdown could be coming. More recently though, they said that the outlook is brightening. A shift towards growth in service businesses aided by tax cuts could be a positive for the Chinese economy. Moreover, relaxing restrictions on foreign investment could boost investment and further spur growth.

A resurgence in the Chinese economy would likely be beneficial to financial markets around the globe. As China grows, the world economy would likely follow, aiding large companies in the U.S. with sales abroad. Recent earnings reports from large U.S. corporations have indicated that American businesses have been resilient, but foreign business has slowed markedly in the second quarter. A resurgence of foreign growth could reverse this trend and boost stock prices of these companies, especially those with lots of exposure to China.