China’s PMI, copper and the Aussie

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Another sign of a slowdown in China. On Thursday HSBC published its flash PMI manufacturing index for June (the earliest economic data for the month), showing a sharp drop from 51.6 in May to 50.1.

As HSBC says, this level of PMI is consistent with industrial production growth of 13 per cent a year. So, a slowdown not a meltdown. But there could still be investment implications, not least for copper.

Hongbin Qu, HSBC’s China chief economist, said:

Demand is cooling thanks to the effect of tightening measures and the slackness in external markets. This, plus the ongoing inventory destocking, has led to a slowdown in output growth. But hard-landing worries are unwarranted not least because the current PMI is at a level consistent with around 13% IP growth. The good news is that inflationary pressures started to ease meaningfully in June amid slowing demand.

We will know more when Beijing’s official PMI numbers are published next week.

Markets barely moved on the HSBC release. The Hang Seng was down 0.8 per cent in early trading and later closed 0.46 per cent lower. The Shanghai Composite closed up 1.47 per cent.

However, there is food for thought in the data. The last time the PMI index was this low – in July 2010 – copper prices were nearer $7,000 a tonne, compared to around $9,000 now.

Also, a Hong Kong analyst points out that the numbers suggest Aussie dollar might be over-valued. The Aussie has tracked the China PMI closely in recent years – until this year, as shown in the chart below, based on Bloomberg data.

Intriguing.

Related reading
China’s towering debt threat, beyondbrics
Guest post: China’s non-bank credit bubble, beyondbrics
Chinese property – a bubble ready to pop?, beyondbrics
Beijing’s Financial Day of Reckoning Is Near, WSJ

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