Here comes the confirmation with a poor flash PMI for March. From Markit;
“Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders which came in at a four-month low. External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook. More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises’ hiring desire. The soft-patch in manufacturing was in line with the recent downside surprise in industrial production growth. Growth momentum could slow down further amid a combination of sluggish export new orders and softening domestic demand. This calls for further easing steps from the Beijing authority.”
This may be a targeted and essentially pinpointed move, but looking at the data coming on China in the first quarter of 2012, I think there is plenty more to come as China tries to come to grips with a rapidly slowing economy.
China boosted rural credit by cutting reserve requirements for an additional 379 branches of Agricultural Bank of China Ltd. (601288), the nation’s third-biggest lender by market value. Effective March 25, the ratio falls by 2 percentage points for the branches in the provinces of Heilongjiang, Henan, Hebei and Anhui, the People’s Bank of China said in a statement on its website yesterday. The move expands a trial that previously lowered requirements for 563 branches in eight provinces. The latest move means a total of 23 billion yuan ($3.6 billion) has been freed up, the PBOC said.
Money supply growth has effectively stalled in China and with the recent statement by BHP Billiton that Chinese steel output had flattened what they really meant was that they are now seriously concerned about a severe and lingering slowdown in China. Of course, there are considerable details that must be taken into account here. However, one thing that we must understand is that production capacity (supply) of hard commodities may turn out to have structurally overshot demand even in mighty China.
So far, we must give Chinese authorities the benefit of the doubt and it is almost certain that they will now turn from a focus on inflation to a focus on growth. This is particularly the case as inflation has come down significantly in China and while base effects will be an important part of this story, the sharp retrenchment of liquidity will also have mattered.
In my view, markets are likely to turn to growth in the next months where disappointing data out of China and the US are likely to put a dent in an otherwise strong rally.