While the rest of the world was blissfully enjoying its latest reflation experiment, one country that has hardly been quite as ecstatic about all the blistering free money entering its real estate market (if not so much the Shanghai Composite) still warm off the presses of the G-7 central banks, has been China. Because China knows very well that while in the rest of the world, free money enters the stock market first and lingers there, in China the line between the reflating house market and the price of hogs - that all critical commodity needed to preserve social stability - is very thin. As a result, last week China withdrew a record CNY900 billion out of the repo market - the first such liquidity pull in eight months. This move had one purpose only - to telegraph to the rest of the world that the nation, whose central bank has patiently stayed quiet during the recent balance sheet expansion euphoria, will no longer sit idly by as hot money lift every real estate offer in China. Moments ago we got the second sign that China is less than happy with the reflating status quo, when the HSBC Flash PMI index for February missed expectations of a 52.2 print by a big margin, instead dropping from the final January print of 52.3 to just barely above contraction territory, or 50.4. This was the lowest print in the past four months, or just when the PMI data turned from contracting to expanding in November of last year.
While we won't know for sure if it is officially China's stance that the rest of the central bankers must back off now until the other PMI number is released, the official Chinese sourced one, it is quite likely that the official February print will be just as weak if not more. Recall that as the chart below shows, January official PMI already posted not only a major miss to expectations, but a decline. As such today's HSBC drop merely cemented what the official data was already telegraphing.
If indeed the official PMI print comes well below expectations, or is even negative, then just like in 2011, the reflation party is slowly but surely ending, as the world's marginal economy - not only in terms of growth but of hot money attraction - says no more.
This is how the official Chinese data and the HSBC PMIs appear on a side by side basis over the past several years:
Even as the headline and Production indices posted just a barely positive reading in February, already four sub-indices were in contraction territory:
Visually, from the MarkIt report:
And of course, since a miss in the PMI destroys the house of cards "recovery" strawman so carefully built by the Wall Street sell side for months and months, here comes the first defense of the miss. It is from Barclays, whose logic is that since the Chinese New Year fall in February, the PMI was obviously going to miss. Of course, what they fail to mention is that everyone else knew that this particular calendar oddity would take place in February, and thus could adjust their expectations accordingly. But only in retrospect, it appears, is what is glaringly obvious now, should have been so glaringly obvious when other firms were setting their HSBC PMI expectations.
- HSBC flash manufacturing PMI fell to 50.4 from 52.3. We have been highlighting to watch for March, when the NBS PMI (out on Mar 1), could fall to below 50 (we forecast 49.6) from 50.4 in Jan, owning to CNY effects when factories are closed. The NBS PMI has always posted a m/m decline when the CNY falls in Feb. While the HSBC PMI exhibits less seasonal trend (or say better seasonally adjusted), we have talked about that there are fewer official working days this Feb (17) than Jan (22).
- Seeing beyond Jan/Feb distortions, we think China’s growth recovery remains on track at the beginning of the year, supported by restocking (from the supply side) and domestic demand with continued investment and robust consumption growth as evidenced by the CNY sales. But we are not expecting strong rebound given external uncertainties and we maintain our below-consensus growth forecast of 7.9% for 2013.
- Surging Jan total social financing & credit expansion should not be sustained. While growth remains fragile given the external uncertainties, loose monetary conditions, coupled with strong investment impulse by local government and widely talked 50%y/y increase in fiscal deficit in 2013 (to CNY1.2trn) are adding to the risk of possible overheating, inflation pressures, and risk of tightening (one way or another) and slower growth later this year. We had been looking for some tightening of shadow banking activities in 2013 and stricter regulation on local government financing and slower new loan growth in the coming months. But our moderate growth-inflation profile.
- Money market rates have come down recently. To stablise liqudity/rates, the PBoC last week has resumed the repo operations despite significant amount of reverse repo maturing . This evidences loose monetary conditions (partly related to the CNY) and also likely capital inflows. This year, more so than last year, China will face the challenge of balancing growth and inflation risks. External weakness poses downside growth risks and domestic investment impulses post the leadership transition could add to upside risks. The PBoC (now that Governor Zhou likely stays on at least for a while) will face the challenge of continuing to push forward financial reforms (more liberalized interest rates, more flexible exchange rate and further opening capital account) amid capital inflow pressures under the QE
So you must please ignore this data: after all, it, along with virtually every other data point in the past several weeks has been a major miss, which means that one should not pay any attention to it. As everyone knows, in the New Normal only upside beats matter.