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Business
Print Edition> Business
UPDATED: July 8, 2013 NO. 28 JULY 11, 2013
Market Watch No. 28, 2013
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OPINION

PMI Tests China's Tolerance for a Slowdown

The purchasing managers' index (PMI) for the manufacturing sector fell to a four-month low of 50.1 percent in June from 50.8 percent in May, according to the data issued by the China Federation of Logistics and Purchasing (CFLP) on July 1. The same day, the final reading of a separate PMI for the manufacturing sector in June, released by HSBC Holdings, retreated to a nine-month low of 48.2, indicating a further weakening of the sector. This is the second consecutive month that the HSBC PMI is below 50, the demarcation line between expansion and contraction.

June's PMI data reflect the following problems.

Small and medium-sized enterprises (SMEs) are the most vulnerable ones. The PMI sub-index for medium-sized enterprises and small enterprises stood at 49.8 percent and 48.9 percent, respectively, much lower than the 50.4 percent for large enterprises, according to the CFLP. The data are similar to the HSBC PMI, which pays more attention to SMEs. The business environment for SMEs is continuously worsening amid lackluster domestic and foreign demand.

Continuous oversupply shows the Chinese economy is plagued by excess capacity and the country is digesting that capacity. This deals a heavy blow to the job market.

Faltering new orders and new export businesses indicate lackluster foreign demand.

The shrinking throughput of foreign trade products said the same. In May, the throughput of foreign trade products only increased 3.5 percent, 12.3 percentage points lower than the same period last year and 2.9 percentage points lower than the April data, according to the Ministry of Transport.

The sub-index for raw material purchase prices also fell in June, indicating a more negative outlook from enterprises.

The drop of PMI data signals downward pressure on the world's second largest economy, which is in a dilemma.

The international environment is telling. The United States can hardly maintain strong economic recovery through quantitative easing; Europe is still smarting from restructuring after the debt crisis; Japan, spurred by the depreciation of the yen which benefits its exports, is quite reluctant to roll out any adjustment in its industrial structure; emerging markets, after recording fast growth for several years, are gripped by stagflation risks.

The domestic environment is equally worrying, with hefty local government debt, worsening enterprise profits, mounting employment pressures and sluggish external demand.

How should China react to these problems? The answers may be found in the State Council's economic analysis conference for the first half of 2013 that is to be held in the middle of July. This conference will also decide the policy for the recent credit crunch turmoil.

Several senior Chinese officials have recently made remarks in this regard: The Chinese Government will intensify efforts in transforming its government-driven growth model to a market-oriented one. To realize the goal, China is willing to pay the price of a slowdown in growth. The country will abandon the use of a loose monetary policy to shore up growth and turn to controlling credit growth and invigorate current money reserves.

While the Chinese Government showed more-than-ever tolerance for an economic slowdown, enterprises should stop rampant expansion to avoid risks from possible market turbulence.

Local governments, long gripped by fiscal revenue pressures, are a key factor that has hobbled the Chinese economy this year. Amid an economic slowdown, the fiscal revenue of local governments has seen slower growth or even shrunk. Local governments should get used to it and stop excess stimulus in investment and domestic consumption.

With the new tone on economic policy, the market should get used to the tightening monetary environment and turn to more prudent operations. The only question is whether the economic growth will fall below the Central Government's bottom line. If so, policies will be adjusted accordingly.

This is an edited excerpt of an article by Zhou Zixun, a financial commentator, published in Shanghai Securities News 

THE MARKETS

Growth Forecasts

Nearly half of China's A-share listed enterprises have issued growth forecasts for the first half of the year, with most companies reporting mild growth overall.

As of July 1, 939 companies listed on the Shanghai and Shenzhen bourses had released profit forecasts for the first half. More companies are expected to do the same soon.

The companies forecast combined net profits of 55.1 billion yuan to 75 billion yuan ($8.92 billion to $12.14 billion) for the first half and a net profit growth range of 2.86-7.7 percent year-on-year, Shanghai Securities News reported on July 2.

But the year-on-year growth rate range was much lower than the 10.27-percent average growth rate reported in the first quarter.

Of the 939 companies, 457 companies forecast year-on-year profit growth, while 254 companies expect profit drops or even losses.

The Shanghai and Shenzhen stock exchanges had 2,494 listed companies at the end of 2012.

Energy Acquisition

China Petrochemical Corp. (Sinopec) said on June 29 that it has completed the purchase of 50 percent of Chesapeake's share in its Mississippi Lime assets for $1.02 billion.

Chesapeake is the second largest natural gas developer in the United States and its Mississippi Lime oil and natural gas assets are in northern Oklahoma.

Sinopec signed the agreement with Chesapeake on February 23 through its wholly owned subsidiary Sinopec International Petroleum Exploration and Production Corp.

The deal means Sinopec acquires 425,000 acres (171,991 hectares) in the Mississippi Lime shale formation, with estimated proven and probable oil equivalent of 245 million barrels.

Limestone gas, along with shale gas and coalbed methane, is considered to be a source of unconventional gas.

NUMBERS

64

Number of mergers and acquisitions (M&As) in the Chinese market in June. All but two revealed their transaction value, totalling $2.7 billion

$644.89 mln

Transaction value of the five Chinese companies that completed overseas M&As in June

$1.3 bln

Transaction value of M&As in the real estate sector in June

Email us at: yushujun@bjreview.com



 
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