A Perfectly Modulated Indicator puts off China’s OMG moment

The latest HSBC Flash PMI number falls perfectly. At 49.5 it shows an improvement on the past five months but it is still below 50 for the ninth consecutive month. Optimists can scent signs of stronger growth, while the below-50 reading will be taken by others as an indication that further stimulus measures will come through to lift growth further. What is clear from this reading on top of the latest stabilisation or rise of loans and fixed asset investment (see charts below) that the Oh My God! moment touted for China by commentators over the past month is not about to dawn.

FAI growth

Corporate loan demand

Drains as well as trains. Still the e reality is that China is not going to come roaring back in H2/12. But there will be a mild recovery as a result of the government shifting its focus towards encouraging growth with easing measures. Those measures include two interest rate cuts, selective relaxation of credit restrictions for local authorities, window guidance for new loans and accelerated approval of infrastructure projects (increased railway spending, announced last week, and central government help for social housing). The inadequacy of Beijing’s sewer to deal with the weekend floods that killed 37 people was just one example of why the PRC needs drains as much as trains.

Nice timing. Freshly appointed officials at provincial and sub-provincial levels will push new local projects as the year draws on, meaning a higher growth rate in Q4/12 and Q1/13 – just as the Communist Party holds its five-yearly Congress and convenient for the annual session of the National People’s Congress next March. That should take the growth number up to 8 per cent, without the need for a 2008-style broad stimulus programme.

Policymakers think they can get through the downward factors imported from Europe by fine-tuning – and so far they have been proved correct, with the labour market staying quite tight, inflation dropping faster than expected and corporate loans increasing from their low level at the start of this year.

Quality not quantity. The numbers may look poor compared with the runaway growth stimulated by the 2008-10 package. But they are what is needed to introduce the medium-term stability required for rebalancing and at least some of the structural reforms the economy badly needs.

The old debate about whether China is heading for the stars or for a collapse will continue in view of the amount of energy the bull and bear proponents have invested in it. But increasingly it is likely to be the wrong debate. The big question now is about the quality of growth – and here the PRC still has a long way to go as its future leaders acknowledge.