The China Federation of Logistics and Purchasing has released its latest monthly Purchasing Managers’ Index (PMI), and the news is mostly good. The PMI came in at 55.2 in November, unchanged from the month before, but holding steady at the fastest rate of expansion in 18 months. What’s more, it was the ninth consecutive month that the index has shown expansion of manufacturing activity, and most numbers have recovered to pre-crisis levels.
Most numbers, but not all. Export indicators remain weak as external demand continues to suffer. Although the "new export orders" component of the PMI, at 53.6, indicated expansion, it was at a slower rate than October. It is a reminder that sustainable growth in the long term will rely on encouraging domestic demand and consumption, and may be seen in Beijing as further justification for the Politburo’s decision to stay the course on macroeconomic policy next year. Weak exports are clearly a sore point among the senior leadership; on Monday, Premier Wen Jiabao sharply criticized foreign countries for calliing for renminbi appreciation while they implemented arguably protectionist trade policies. But weak exports or not, increasing manufacturing activity is an encouraging sign that private investment may be strengthening, and that a loose monetary environment won’t be necessary for long.
For now, however – and despite threats of tightening capital adequacy ratio requirements at banks – we remain in a state of easy lending. Reports that China’s banks will issue US$1 trillion in new loans next year, on top of the US$1.4 trillion issued this year, will be of little comfort to those worried about asset bubbles and overcapacity. Given this year’s wide reports of misallocated loans, these are valid concerns.
The PMI data are positive, but by no means indicate that China has left its troubles far behind. Growth is good, but there is still a lot of work to be done.