China’s PMI per the HSBC/Markit survey was 47.8, the eighth consecutive month of contraction (and the lowest reading in 9 months).
Additionally, today’s New York Times contained an article suggesting lack of customer demand with resulting build-up of inventories. According to the article:
“The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home. . . .
“Inventories of unsold cars are soaring at dealerships across the nation. Quality problems are emerging. . . .
“The Public Security Bureau, for example, has halted the release of data about slumping car registrations. Data on the steel sector has been repeatedly revised this year after a new methodology showed a steeper downturn than the government had acknowledged. And while rows of empty apartment buildings line highways outside major cities all over China, the government has not released information about the number of empty apartments since 2008, according to a report last Friday.”
This appears similar to the picture that emerges when individual companies fail to meet expectations. They induce customers to buy extra inventory and report that sales are good. Sometimes growth/demand can return and everything is ok. If that does not happen, the charade has a finite life. Customers reach the point where they cannot take any more inventory, and the manufacturer needs to ‘come clean.’ When this finally happens, the situation is worse than if a company had admitted the problem early. In this scenario, there is excess inventory in the channel that must be worked down, driving the company to lower production below baseline until this excess is absorbed.
There are repeated hints and suggestions of this type of picture occurring in China on a grand scale. These hints do not constitute proof, but I think it would be foolish to ignore them.
In 2009, China was looked upon as the growth engine that would rescue the global economy. In 2010 and 2011, China contributed to emergency loans to peripheral Europe (news of China’s largess usually was enough to boost markets by 50-100 basis points). I can’t believe that a slowdown in China would be inconsequential. The fear of a potential slowdown in China does not guide my investing (I assess companies individually). However, I admittedly have a bearish posture, and I take comfort in knowing, that if China suffers a hard landing, such a posture would protect me.
source: NY Times