<title>China economic and environmental briefing: China welcomes the Dragon</title>
China economic and environmental briefing: China welcomes the Dragon… But has this one lost its fire?

China economic and environmental briefing: China welcomes the Dragon… But has this one lost its fire?

This week marked the release of the first piece of economic data illustrating the strength of China’s economy in the year of the Dragon. HSBC’s Flash PMI, published on Tuesday (coming a week before the official Chinese government PMI) gives an early indication of the strength of the country’s manufacturing sector. The PMI index rebounded slightly to 49.7, up 0.9 from January as factories begin to start work again but importantly marks the fourth consecutive month where manufacturing activity is contracting.

The PMI data also showed export orders falling to an 8-month low. Only two weeks ago Chinese customs data revealed that the country’s exports fell 0.5% in January from year earlier levels, the first decline in more than two years. So how much of this weak data can be attributed to the Chinese New Year? Well in 2012, the Chinese New Year holiday fell on 23 January, the earliest since 2004 pointing towards January’s economic activity being more subdued than normal.

Now almost one month since then, reports of labour shortages abound as migrant workers fail to return to work, this exacerbating the impact of the Chinese New Year on economic activity well into February. Cities such as Beijing, Shenzhen and Guangzhou are still short of hundreds of thousands of workers, Shandong province alone is missing one-third of its workforce.

While weaker manufacturing output and export order books can be seen as a reflection of the broader slowdown elsewhere in the world, particularly Europe, the 15.7% fall in imports in January can not just be attributed to weak overseas markets and the Chinese New Year. Softer domestic demand is likely to have been a factor as the property market and domestic investment cools.

What can China do to help support the domestic Chinese economy? Well to a large degree that depends on what will happen to inflation. Chinese inflation jumped to 4.5% in January, up from 4.1% in December and breaking a streak of five consecutive months of lower inflation. In the short term inflation is likely to moderate further over coming months as the impact of the Chinese New Year falls away.

Indeed the Peoples Bank of China, the country’s central bank took the opportunity to lower the reserve requirement ratio of banks by 50 basis points (as of 24th February), potentially freeing up $64bn of new lending. As an analysis from The Economist pointed out, China of all the emerging economies is in the top 5 in terms of capacity for further monetary and fiscal policy easing, so called “wiggle room”. Expect more signs of easing in coming months.

Attention in recent weeks has also focused on the countries wage levels, especially the company Foxconn, who as a key supplier to Apple recently raised salaries at their Chinese factories by 25%. The Chinese government, as a matter of national policy, has been increasing minimum wage levels by 15 percent to 25 percent annually for the past three years with different provinces able to alter their wage according to local needs. Although wages are increasing at a faster rate in the coastal manufacturing areas than the interior, rising living costs in cities such as Shanghai mean that many migrants find they are better off staying closer to home.

US scientists have used satellite data to create the first estimates of ground level particulate pollution in China. Particulate concentrations are the highest in Shandong and Henan provinces. Unsurprisingly, less developed western provinces such as Tibet and Inner Mongolia have the lowest fine particulate matter concentrations.

Beijing, Shanghai and Guangdong province have experienced slight decreases in particulate levels over the last three years, although concentrations have remained fairly steady over the last nine years. Indeed the decline since 2008 will be partly due to economic activity in certain regions but also due to government efforts to shutdown ageing and inefficient manufacturing facilities.

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Peter Sainsbury

Materials Risk provides commodity market insights across your supply chain by highlighting emerging risks and opportunities and providing advice on commodity buying and managing risk. All views expressed on this website are those of Materials Risk only. See our About page and terms and conditions for more details. Materials Risk was founded by Peter Sainsbury who you can follow on Google+ and Quora

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