Chinese Manufacturing continues to grow in August

Both the official Purchasing Managers Index (released by the Chinese Federation of Logistics and Purchasing) and the renamed HSBC PMI (changed from the CLSA PMI) indicated further expansion in the China’s manufacturing.  The former moving up to 54 from 53.3 in July; the latter showed an overall increase to 55.1 from 52.8 in July.

Although the official line being presented from the Chinese Government is that such data is pointing to an economic rebound that will maintain momentum, there is concern amongst some observers that the recovery as a
whole is not sustainable (GDP growth for the year is expected to be just over 8.3%).  Already there are signs that the Shanghai Composite Index is a bubble created by excess liquidity in the system; the index dropped
6.7% on 31st August.  Some expect the correction to be as much as a 25% lower.

As we have suggested previously, the growth in the Chinese manufacturing sector is largely seen to be a consequence of increased domestic demand buoyed by Central Government’s $585 billon stimulus package that has also been supported by $1 trillion of new loans in the first six months of the year.   Notably, the Government have stepped in and now require lenders to raise reserves to 150 percent of non-performing loans by the end of the year.  As a result, we are expecting a possible tightening of liquidity for suppliers and would suggest that any buyers continue with their ‘under the hood’ approach to their due diligence of suppliers.