Thomas G. Ernst & Co.


Chinas' should expand solidly again this year

China non-manufacturing PMI rose to 55.0 from 53.4

The Markit manufacturing PMI was confirmed at 48.5 this month, down from 49.5 in January. But the non-manufacturing PMI rose to 55.0 from 53.4, not far off its average of the past three years. The official manufacturing PMI, which has a larger sample size than the Markit equivalent, was 50.2 in February, roughly in-line with its average during 2012 when the Chinese economy grew 7.7%. Growth is gradually slowing in China, but it will probably remain strong for the foreseeable future.

The Chinese authorities are letting the pace of expansion gradually slow in order to combat rapidly rising credit and shift the balance of demand away from over-investment and towards consumption. This is a healthy change rather than a huge danger for the world economy. The authorities have allthe levers of policy available to combat any problems that arise. Inflation and public debt are low, the private saving rate is high, and they have enormous foreign exchange
reserves. We expect China to grow 7.4% this year and 7.2% next year (according Berenberg Bank).

PMI=Purchasing Managers Index (index based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.) Sometimes referred to as ISM index.
The non-manufacturing index shows results for the majority of the total economy, most notably the services industries. Both Indexes capture industries making up nearly 90% of total GDP.