The Cynical Take on China's PMI Index

Posted On: Wednesday, May 2, 2012

Economic data since the end of the first quarter has shown a marked deceleration across all economies. The reasons for the slowdown are not too hard to pinpoint, and include a downturn in the Chinese property market and fiscal austerity in Europe. It was revealed ths week that the U.K. and Spain have officially re-entered recession, or the dreaded double-dip, and many are forecasting much of Europe to be in recession before long. In China, measures to cool a red-hot property market are taking their toll, with property prices and property investment falling.

Amid these themes, interested parties parse the daily stream of economic numbers to understand where economies are heading. It is not uncommon for data to show conflicting signals, as evidenced this week by the much better than expected Chicago PMI index, only to be followed the next day by a worse than expected ISM manufacturing index. In China, two different sources provide purchasing manager indexes, and over the last few month's, these indices have diverged to a record. Obviously, one of the indexes is wrong.

Next month will see the next release of these numbers, and it would not be surprising to see the inevitable return to correlation between China's official data, and HSBC's PMI.

 As can be seen, the official Chinese PMI index has a history of over-estimating Chinese PMI relative to the HSBC PMI index. It is also clear that both, over-time do track each other. However, at important turning points, the officialy Chinese PMI is always erring to the upside. The cynical take on this divergence is that there is a concerted effort by Chinese statisticians to delay reality as long as is possible. Perhaps this time is different, and the HSBC PMI index is too pessimistic. However, judging from prior data, it would appear that the official Chinese PMI data is due for a sharp downward correction.  

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