China’s manufacturing is contracting

With the European debt crisis effecting consumer confidence around the globe, HSBC’s China Purchasing Managers’ Index (PMI) dropped to 47.7, a little bit weaker than last weeks preliminary flash figure. Values below 50 indicates the conditions are contracting and deteriorating.

Today’s figure comes in at a 32 month low. The last time such a contraction was recorded in Chinese manufacturing was during the GFC when world consumers first closed tight their purse strings. At the time, China turned to fixed asset investment as a stimulus to help bridge the gap until the world economies recovered, and started to spend beyond their means again.

China needs to move from a export driven economy to a consumer driven economy, but such a transformation is expected to be slow. John Lee, an adjunct professor at Sydney University last week told the Weekend Australian Financial Review one option to counteract falls in manufacturing could be to ramp up fixed asset investment in infrastructure, property and heavy industry. The AFR even used Lee’s own wording, “they’ll continue to build stuff they don’t actually need.”

One heavily publicised fixed asset investment has been China’s empty cities. In December 2009, we wrote about Ordos, in Inner Mongolia, a city designed and built to home 1 million people, only no one lives there, only cash. It was a place to speculate in China’s property bubble and park your money. House prices only go up. The writing was on the wall, and reports in the last couple of weeks suggest the bubble has finally burst. Real estate prices in Ordos is now 3,000 yuan per square meter, down57 percent from 7,000 yuan per square meter during the boom period.

Last month was witness to some large and dramatic changes in China’s property market, with a wave of real estate agency closures due to plummeting turnover and developers slashing apartment prices by 20 to 30 percent. While China’s Premier Wen Jiabao said China is targeting a “reasonable correction” in the property market and wouldn’t be relaxing measures designed to cool speculation in China’s property market, The People’s Bank of China has today lowered banks reserve ratios by 50 basis points, in a bid to free up an estimated RMB 396 billion to be pumped into China’s slowing economy.

“The move by China to reduce the reserve requirements last night is interesting, it indicates they are getting a bit nervous over there,” commented Robert Pavlik, chief market strategist at Banyan Partners in an article featured on Market Watch.

Time will tell if China can escape unbruised from this latest world crisis.

» China to Lower Reserve-ratio; PMI Falls to 49% – Business China, 1st December 2011.
» China PMI surveys shows manufacturing contracting – Market Watch, 1st December 2011.
» Stay cautious as bubbles burst amid tighter money – The Hong Kong Standard, 1st December 2011.
» Flash of Gloom in China’s PMI The Wall Street Journal, 23rd November 2011.


  1. Looks like the ponzi bubble will continue. World Banks have all got together to increase credit supply. I would not be surprised if house prices start increasing again. At this rate I will never be able to buy a home for my family. Why has the world not learnt from the GFC. Why do the ponzi banks think that more credit will help things. I am considering buying gold bullion now as the monetary system will collapse in the next 2 years. Bring back the gold standard.

  2. Take a deep breath dreamdog. House prices here are not subject to the world economy. We would of gone down with America if that was the case.
    We are subject to what happens here.

    What has happened in Euro has lit the fire much deeper, to what is about to happen here. We will decline economically and assets will drop even more (have been already before this event).The Euro is tied to China and if the Euro does less trade with China we will feel the pain here.
    The truth of house prices will regress the next 5 years.They started as I predicted in 2010 and will continue until 2015.

    Aside from all this, the rise of the cost of living is what has broken the stem of house price rises and will continue.

    China is headed for an implosion. NOI matter what it does it cannot control what it has started in late 2008. Chinese don’t spend and retail spending is the engine room of any economy. If retail drops (as it has here) so will everything else and it is doing that.

    Gold and silver is the place to be. With America loaning cheap dollars to the Euro, it will bring it’s value down and Gold and silver will rise. You will NEVER fix the Euro or the American dollar it is gone and it’s a matter of time now for a new one world currency to begins.

    Capitalism is never the answer as it creates and destroys society nor is socialism as it creates a slumber and apathy and discontentment.
    What is needed who knows, we tried both and they do not work. Maybe we should bring in Hedonism where pleasure is taken place over wealth and happiness is taken place over discouragement. If we bring the two together we get to a place of contentment. mmm still can be a someone and have allot of fun in doing so.

  3. ** China needs to move from a export driven economy to a consumer driven economy **

    How on earth are the local people living on $2.00 a month expected to take up the buying of all that plastic crap China exports. Take a good look through the shopping center where you get to trade your labour for this crap. its no wonder the Chinese export it. they must think we are insane to buy it.

    Peak oil.. and we rape the planet to produce squinkies and barbie dolls, maybe we are insane.

  4. Its only a matter of time before China goes throught the biggest correction in history. It is coming and it is going to be Ugly.

  5. Yoda reckons RBA will cut today as they are packin darkies that society will off with their heads if they don’t.
    RE is tanking and accelerating down now, valuations dropping, sales down 30%. HIA screaming for 50 bps cut.

    Iron Ore off almost 50% in a few months. The ponzi scheme is up, and who holds now will be stuck with it.
    China is falling down hard now, despite the propaganda, Europe is in a depression with the US.

    Sucks to be in debt, on a falling asset like RE.

    Send all you love to the creators of the ponzi scheme, the banksters and their servants our parliament.
    Signed a alien that disclaims all liability from our current idiots runnng Australia into the ground for the New World Order.

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