China Beige Book, HSBC Manufacturing PMI Paint Diametrically Opposing Pictures Of China's Economy

Tyler Durden's picture

S&P 500 futures are jumping exuberantly as Japan and China PMIs print above expectations and back in expansion territory (Japan best in 3 months, China best in 7 months). This is China's best 2-month PMI rise since Oct 2010 (which makes perfect sense amid the collapsing housing market and CCFD ponzi probe) - which provides the perfect propaganda meme that targeted RRR cuts workl. However, while stocks don;t care to scratch the surface, there are 2 glaring similarities that could become a problem. Both China and Japan saw employment drop (Japan's first in 11 months) and furthermore both China and Japan saw input prices rise and output prices decline - not exactly the margin expansion dream everyone is hoping for... and all this as China's Beige Book shows the slowdown deepening on weak investment.


China's Manufacturing PMI saw its best 2 months since Oct 2010... so RRRs work right?


Which is odd given that GDP expectations continue to collapse... (h/t @M_McDonough )


And China and Japan both see employment drop and margin pressures build...


as Japan employment tumbles...


But none of that "fact" details matter - you buy stocks...


As China's Beige Book was anything but positive...


China’s economy continues to decelerate quarter-on-quarter, driven by “perhaps unprecedented weakness” in capital expenditure, China Beige Book says in its 2Q survey released today.

* Fewest number of firms increasing investment and most pronounced quarter-on-quarter drop in 10 quarters of surveys
* Fewer companies surveyed accessed credit from banks, shadow lenders and the bond market
* Survey finds loan rates inverted, with bank interest rates ticking up in the quarter while non-bank rates saw a “substantial slide” to below levels offered by banks
* Firms appear to be responding to current economic conditions by borrowing and spending less
* Weakness in investment has “sweeping effects” on sectors, regions and gauges of company performance
* Services weakened more sharply while transportation, mining, and retail slowed
* Manufacturing showed year-on-year growth for the fourth quarter in a row and was stable vs previous quarter
* In property sector, residential and commercial realtors “were pummeled,” while builders reported higher starts and rising prices, with stable or larger proportions reporting revenue growth
* Investment slowdown depressed growth in hiring, wages, laboractivism
* Worst-performing sector was minerals as coal producers sawrevenue contraction


*  *  *

So who is making stuff up? Markit (who just IPO'd) or the Chinese government - a 7 month high from Markit's survey? or the worst QoQ drop in 30 months from the Beige Book.

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max2205's picture

SPy on afterburner tonight..."

The Most Interesting Frog in the World's picture

I trust the Chinese government numbers as much as the US government numbers. Both are fucking liars.

Fuck you mother fuckers! Tired of your lying asses...

TeamDepends's picture

Coal burning bright beige, mastuh.

Hindenburg...Oh Man's picture

oh well....hopefully, if nothing else, this is interpreted as inflationary, and = higher gold.

ENTP's picture

No way thats how this is interpreted.  Any signs of inflation is just transitory "noise".  Building ghost cities is the path to true organic growth.  Buy spoos, sell vol,  sell gold, buy bonds, all naked or with printed money out of nowhere, now rinse, lather and repeat.

GrinandBearit's picture

I guess the algos don't know/care that all these government reported numbers are lies.

disabledvet's picture

"collapse in coal is collapse in economy." there's no other way to spin it.

as it is with the USA so it is with China. Demand has "fallen off a cliff" here. Germany looks good.

That's about it.

gianakt's picture

Chinese authorities to anounce over night all copper is accounted for in warehousing system.

Think Like A Crook's picture

Same ole, same ole.  But it kills me how a 4.5 pt or .23% move is "S&P Futures jumping exhuberantly." 

RagnarDanneskjold's picture
800,000 Tons of Copper Could Hit the Market

"At present, in all of the country's Free Trade Zones there is a conservative estimate of 800,000 tons of copper. The copper is stored in the bonded warehouses for a reason, for financing collateral. These are basically foreign financing credit lines, if the maturity is not extended, the copper will certainly be shipped. One direction is the general trade import declaration, the other is transferred to LME warehouses. No matter which direction will the sudden increase in supply of several hundred thousand tons of copper."

Wild Theories's picture

I think I'm gonna bookmark your link for frontrunning the Tylers.

Oldwood's picture

So how does Markit differ in their analysis of these economics from say S&P? I mean who pays for this and does their fee diminish with bad news reviews? I assume people pay for results, and regardless of who is paying, my assumption is that NONE of them wants negative news.

Wild Theories's picture

Without knowing the exact makeup of their survey pool, you don't know. The methodology should be pretty similar, the difference is really the makeup of their survey pool, where they are getting their data from.

Markit's survey pool is 400-500 companies for PMI iirc, Chinese govt survey pool for PMI is 2000 companies.


I actually don't see a conflict in the story headline fyi, investment decrease and PMI increase could simply be different parts of the country. Markit and the Chinese govt's focus have always been different, and I always suspected Markit's research may be more accurate of the coastal exporting areas but less of the interior, whereas the Chinese govt survey pool has bigger more complete coverage of the country with more state enterprise less private sector focus in the mix.

TheRideNeverEnds's picture

bad news is good news, good news is good news, no news is good news.  


you know the old saying; buy every day then go away.  

starman's picture

the greater a counrties credit debt the better the economy! no seriously I read it on .gov.

Youri Carma's picture

BOTTOMS UP LINE: China’s Slowdown Deepening On “Unprecedented Weakness” In Capital Investment

- Fewer Chinese companies accessed credit in 2Q

- Fewest number of firms increasing investment and most pronounced quarter-on-quarter drop in 10 quarters of surveys

- China’s economy continues to decelerate quarter-on-quarter, in 2Q, driven by “unprecedented weakness” in capital expenditure

And that's a bitch!

jubber's picture

Hang Seng drops 750 points from overnight spike

jubber's picture

and suddenly US futures all turn green en masse, dragging European futures sharply up, DAX driven up 80 points,Gold and Silver sold into the red, more utter garbage out of the US as the whole of the ROW was deeply red

AdvancingTime's picture

 It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. At some point the return on loaning money is simply not worth the risk!

 Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008.

When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants. More on this subject below.

AdvancingTime's picture

 Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Like a plane on autopilot China continued in the direction it had been on.

Now China finds itself in a credit trap. For years the people of China have had the habit of saving much of what they earn but the low interest rates paid at banks has not rewarded savers. With few investment options much of this money has drifted towards housing and driven housing prices sky high. The economic efficiency of credit is beginning to collapse in China and the unwinding of China’s giant credit spree could be very painful. More in the article below.

MacroEyes's picture

Here is some great commentary from April (full note) from the geo political intel firm, Political Alpha.  Touches on a lot of these points, and I know they work closely with CBB.  



Why China’s PMIs May Deceive You This Spring  

April 10, 2014  



Data last week showed China’s official manufacturing purchasing managers’ index (PMI) for March inched up to 50.3, from 50.2 in February.  Since a PMI reading above 50 indicates expansion (below 50 means contraction), the markets reacted as they always have: they went up.  This despite the obvious overall slowdown.  


This highlights a serious problem in “China watching” by even some of the most sophisticated institutional investors.  Historically, China has been a manufacturing economy, and as a result, the manufacturing sector has traditionally been viewed as a microcosm of China writ large.  The problem is, this notion is no longer correct—and hasn’t been for some time.  As we explained back in our 5/23/13 note, “To Assess China’s Trajectory, Watch the Bond Market not the PMIs,” not only is manufacturing no longer the bellwether of the economy, more often than not it now performs counter-cyclically.


And that’s just the tip of the iceberg in terms of investors’ PMI confusion.  If the monthly PMI numbers are one of the central prisms through which you evaluate China’s economic health, you really need to read on…


China PMIs: A Quick Overview


There are two sets of PMIs for China: one put out by the government, the other run as a private collaboration between HSBC and Markit, a global data firm.  Each separately present both a manufacturing sector index and a services sector index, though for many years the services PMI was seen as little more than the bastard stepchild of the manufacturing one.


Interestingly, the two indexes disagree almost as often as they agree.  This is due partly to sample size: HSBC’s PMI surveys only about 400 firms (the ‘flash’ PMI is 85-90% of that) while the official PMI was recently raised to 3,000 firms.  But the main difference is believed to be the type of firms interviewed: the official PMI focuses more on larger firms, particularly SOEs, and especially those on the affluent coast, while the HSBC survey focuses more on SMEs, with a greater share of those firms from the inland provinces.


These differences aside, both have one thing in common: neither manufacturing PMI should be seen as a reflection of the Chinese economy as a whole.  While the government admitted as much in a statement a few months ago, the China Beige Book (CBB) backs this up with specific data in several of its recent reports:

  • In explaining the dynamics of the 2013 slowdown in last quarter’s report, CBB noted that from Q1 to Q4 its national results were weaker in every sector of the economy except manufacturing, which showed a mild uptick…despite the overall deceleration.
  • In CBB’s new Q1 advance data, retail, services, mining, transport, and real estate all saw substantial drops in the share of firms reporting revenue growth from a year ago.  Manufacturing, which saw moderate on-year growth, was the only sector that didn’t see clear deceleration.  Yet bullish this is not.  According to CBB, “stable first-quarter growth in manufacturing confirms our long-standing thesis that it is no longer the economy’s bellwether.  Instead, a weaker retail performance is the principal driver of the aggregate trend.”

And Now We’re Piling On…


Investors who see the PMI manufacturing performance as a primary forecasting tool are clearly missing the boat.  But there are problems with the indicator that go beyond just the manufacturing gauge.  Here are some other issues that should cause investors pause:


1.  Inputs Don’t Necessarily Resemble Outputs.  The PMI operates as a diffusion index, assigning various sub-categories certain (“special sauce”) percentages of the overall picture—say 30% for new orders, or 10% for inventories.  When the overall number is being computed, all of the inputs are compiled but then multiplied by their respective shares of the special sauce.  Why are some categories assigned more value than others?  Simply because someone who designed the formula once upon a time thought those percentages were a jolly good idea.


Keep in mind, if the special sauce percentages were different—or even routinely updated—the output (final numbers) would in many cases also be different.  And let’s not forget that even after those computations, another special sauce is applied: adjustment for seasonal variation.  The takeaway, therefore, is this: even if these represent well-intentioned efforts to scrub the data, by the time the original inputs have gone through the Special Sauce Car Wash two different times, the output may not resemble the original inputs much, if at all.


2.  Monthly Data Is Full Of White Noise—Particularly In China.  In tracking any monthly number, reporting results even a day late (or early) can sometimes dramatically alter monthly results.  Yet the PMI is premised on the idea that there are hard lines between the 31st of a month and the 1st of the next month—a notion which anyone who has spent significant time enmeshed in Chinese book-keeping would find laughable.  Business is often times reported when convenient, or helpful, rather than when it actually occurs.


Monthly numbers can also have a pernicious effect on trading patterns for a far more innocent reason.  Over the course of a given quarter, growth may tick up for two months even though the third month’s drop ultimately ensures the overall quarterly trend is negative (or the reverse).  Investors who read too much into the intermediate data, however, can be taken for a ride on what is essentially an incomplete data series.  As a result, quarterly data show far clearer trend lines than monthly ones—where white noise often doesn’t become obvious until much farther down the line.


3.  “Experts” Often Misinterpret The Data.  Quite frankly, this one is most disturbing of all:  Often, the “China experts” tasked to comment on the significance of the PMI numbers simply don’t understand the data themselves.  Fall 2013 was a great case in point, when several months of poor data were followed by several months of ostensibly positive ones.  Many so-called experts took to the airwaves to call this a rebound.


A closer look at the data reveals the problem—which became ever-so-clear several months later: two months below 50 (“contraction”) followed by two months above 50 (“expansion”) do not necessarily equate to a bounce-back.  In fact, if the numbers aren’t particularly strong in any given month, the net growth across such a pattern may not even return it to its original level!   In this case, the data was presumably faultless but the talking heads discussing it had no idea what they were talking about.


HSBC seems to have fallen into this trap during the same time period, and quite embarrassingly so.  The bank’s own China team—which puts out the PMI!—was forced to backpedal from its September 23rd announcement that the flash PMI data was “further evidence [of] China’s ongoing growth rebound” to a much more somber conclusion just seven days later: “There are still a lot of structural headwinds ahead.  This is as good as it gets for the time being….[D]on’t expect too sharp an acceleration from here.”


Yikes.  This is what Political Alpha refers to as an utterly shameless 180.  If you need a good laugh, compare the clips yourself: 


- HSBC release on 9/23:

- HSBC release on 9/29:


Sure it’s possible that the extra 10-15% of interviews between the flash PMI and the final PMI all registered catastrophe, but if that subset of just 40 or so interviews over less than one week really altered HSBC’s conclusion that dramatically…that should make you even less confident in the PMI’s forecasting ability.  Either way, this is potentially scary stuff.  Is this really the data you want dictating your market calls on China?


Bottom Line


There are plenty of problems with the China data used by the markets, but it’s important to recognize that not all of the problems come from official data sources.  The China PMI has ensconced itself as a key go-to indicator for investors, but overreliance on it comes with significant risks.  Too often the PMI is misunderstood, misinterpreted, and at times, just flat out misguided.  Global investors, beware. 


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