May 02 - The divergence between two versions of China’s manufacturing PMI is baffling investors about the current state and outlook for corporates in China. Fitch believes the difference may be explained by tighter credit conditions facing China’s private sector companies in contrast to the state-owned entities.
According to the official government index of China’s Manufacturing PMI, manufacturing activity continued to expand in April with the index reaching a 13-month high of 53.3 from 53.1 in March. However, the HSBC index remained below 50, which signals a contraction, at 49.3 in April, although this was an improvement from 48.3 in March.
For nine out of the last 10 months HSBC has shown a contracting economy, whereas the government figure has remained above the important 50-level, only dipping below in November 2011 but then expanding again in the last five months.
Fitch notes the official PMI figure reflects positive returns from large state-owned enterprises in particular, whereas the HSBC index covers only private sector entities excluding the large number of public sector entities. The divergence of the indicators may reflect differential terms of access to credit, with the contracting HSBC index representing the tighter credit conditions for private companies whereas the expanding official index reflects China’s large state-owned entities, which enjoy support for growth and expansion and have easier access to funding.
The official version appears to be in line with recent news that China’s daily output of crude steel increased to a record 2.03 million tons during the first 10 days of April. This follows China’s record monthly steel production of 61.58mt in March.
The HSBC figure of China’s PMI looks to be more in line with South Korea’s 4.7% yoy fall in exports in April, which marked its second consecutive monthly drop. Korean government officials explained that a slowing Chinese economy along with Europe’s deepening recession and the weaker Japanese yen all currently pose downside risks for Korean exports.
Fitch view is that the divergent indices reflect the conditions prevailing for many private sector entities in the current economic climate in China, compared to those conditions for the many state sponsored entities. This is perhaps not surprising from a credit perspective when considering a centrally directed economy trying to integrate a growing capitalist business sector.