China’s economy has posted mixed figures of late. Next week will see the release of the HSBC Flash manufacturing purchasing managers index (PMI). The results of the preliminary survey of purchasing managers in the manufacturing industry has struggled to register above 50 since February. A reading above 50 is considered expansion, while anything under that reading is a contraction. The Chinese PMI was published last month at 49.1. China’s economic rise boosted global growth and increase production of commodities to satisfy Chinese demand. The slowdown of the economy is one of the major risk factors impacting global growth. Internal demand has not offset the lost exports and Bank of China economists are now forecasting a turnaround in the second half of the year. The Chinese premier has warned the market about slower growth to avoid a sudden crash as indicators underperform. The central bank has already cut rates three times this year in an effort to stimulate the economy along with other measures, but it is too early to tell if they will have the desired effect.
The International Monetary Fund (IMF) said at the end of May that the Yuan was no longer overvalued. The Washington based organization went further and suggested that if the currency wants to be included in the Reserve Assets Basket it should move towards a free floating rate of exchange. China is caught in a difficult balancing act. Short term growth needs to be boosted in order to avoid falling further behind but at the same time long term objectives that include much needed structural reforms need to happen to secure long term goals. A free floating exchange falls into the second category, but it is not a priority if Beijing cannot guide China to a soft landing in the current macro climate.
The Chinese PMI disappointed last month by missing expectations at 49.1 when 49.4 was expected. The contraction was worse than forecasted and the leading indicator was a bad sign to commodity exporting nations like Australia and New Zealand that count China as their main trading partners.