China’s Composite PMI sinks! Stimulus program to be announced soon?

14-Dec-2011

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A banker turned social finance entrepreneur. Liu-Yue built and managed two social enterprises. Liu-Yue founded Oxstones Investment Club a searchable cloud-based content platform for knowledge sharing and financial education. Oxstones.com also provides global investors with direct access to U.S. commercial real estate investment opportunities and other alternative strategies. In addition, Liu-Yue also co-founded Cute Brands, Inc. Cute Brands is a cause-oriented character-based brand licensing and social impact fund that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising ultra high net worth clients on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in emerging markets bonds and Latin American equities investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities and special situation investing at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







by Prieur du Plessis, Investment Postcard,

I am a few days late with this commentary as a result of a rather hectic schedule after my return from New York. But rather late than never …

My seasonally adjusted GDP-weighted composite CFLP PMI for China sank from 52.2 in October to 49.5 in November. This marks the first drop below 50 since the great financial crisis of 2008/2009 and it is the lowest since January 2009.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The slump in economic activity became apparent when the CFLP non-manufacturing PMI for November dropped by a massive eight points to 49.7 from 57.7 in October. The drop was in line with what I expected, though, as it followed the normal seasonal weakness in November. It was also evident that the non-manufacturing sector had been below the trends of previous years since the second quarter of this year.

Sources: CFLP; Li & Fung; Plexus Asset Management.

On a seasonally adjusted basis the non-manufacturing PMI fell to 51.4 from 54.6 in October – the lowest level since February 2009.

Sources: CFLP; Li & Fung; Plexus Asset Management.

The weak non-manufacturing PMI comes on top of the seasonally adjusted manufacturing PMI that fell to 48.3 from 50.6 in October.

Sources: CFLP; Li & Fung; Plexus  Asset Management.

It is evident that the significant weakness in the economy is due to a fall-off in domestic demand. Consumer confidence has dropped to levels similar to those during the great financial crisis in 2008/2009 and the uprisings in the MENA countries, which were followed by Japan’s twin disasters. The CFLP non-manufacturing PMI indicates to me that confidence fell even further in November.

Sources: CFLP; Li & Fung; NBSC; Plexus Asset Management

The current three-month moving average of the seasonally adjusted composite PMI is 51.5 and is consistent with 8% GDP growth on a year-ago basis. If there is no improvement in the PMI over the next two months it will indicate that growth has fallen to approximately 7%.

Sources: CFLP; Li & Fung; Dismal Scientist; Plexus Asset Management

That will mean China’s economic growth has fallen below the 8% threshold stated by Beijing to improve employment and incomes to maintain popular support.

I will not be surprised if China soon unveils an economic stimulus program aimed at boosting domestic demand in support of other Western governments, especially to kick-start the European economy. Again, as in 2008/2009, the fallout of a crisis has been worse than the PBoC anticipated. The measures are likely to be aimed at reviving business and consumer confidence. The plans are likely to mirror those of 2008/2009 and will probably include spending on housing, infrastructure, healthcare and social welfare. Tax deduction for capital spending by companies is likely to be included.

I think the first salvo was fired two weeks ago when the PBoC announced that the reserve requirement ratio of banks will be lowered by 50 basis points – for the first time in three years.

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