China PMI Ascends as Global Barometer With Market Sway

When Peter Elston wants to check the pulse of the world economy, one of the indicators he zeroes in on didn’t even exist a decade ago.

The head of Asia-Pacific strategy at Aberdeen Asset Management Asia Ltd. in Singapore isn’t alone in tracking the Chinese Purchasing Managers’ Index, which is released each month by HSBC Holdings Plc and Markit Economics. When January’s preliminary estimate of 49.6 undershot economists’ expectations on Jan. 23, it stoked concern about the outlook for emerging markets and hurt assets from Australia’s dollar to U.S. stocks.

“If you look at the indicators that have moved markets in the last three to five years, I think the HSBC manufacturing PMI for China is certainly up there,” Elston said in an interview. “If I am in the office, I’ll be watching out for it. When the numbers are coming out, I’ll certainly have looked at what the expectations are.”

The focus reflects the growing might of what is now the world’s second-largest economy, the top trading nation and the No. 1 consumer of commodities. January’s preliminary report fed concern the onetime engine of global expansion is sputtering and threatening the health of fellow developing nations, as it slid below the expansion-contraction midpoint of 50.

Two Surveys

In the final reading for January released yesterday, the HSBC/Markit PMI came in at 49.5, compared with 50.5 in December. An employment sub-index indicated the steepest cut in payroll numbers since March 2009. Tomorrow, a separate China PMI by the National Bureau of Statistics and China Federation of Logistics and Purchasing will fall to a six-month low of 50.5, based on the median estimate of analysts surveyed by Bloomberg.

“The PMIs became, over the past few years, more and more meaningful,” said David Gaud, a Hong Kong-based senior money manager at Edmond de Rothschild Asset Management, which oversees about $120 billion. “These have become the main indicators of activity and markets tend to react quite aggressively to any disappointment or good surprise.”

One advantage of the PMIs is that they’re among the first gauges of how the economy did for a month, as government reports on trade, industrial output and fixed asset investment typically are released a few weeks later.

2004 Start

The index now compiled by Markit began in April 2004, started by a company that Markit later acquired. In 2011, HSBC and Markit began releasing flash estimates about a week before the final reading. The government-sponsored manufacturing PMI started in January 2005. Markit Economics is part of the London-based Markit Group Ltd., which competes with Bloomberg LP in selling information and communications to the financial industry.

“Over the last couple of years the market-moving nature of it has greatly increased and demand for it from clients is growing every month,” said Chris Williamson, chief economist at Markit in London.

At Credit Agricole CIB in Hong Kong, economist Dariusz Kowalczyk says he is quizzed by clients “all the time” about an index he views as the most closely-watched indicator outside of the U.S. and Europe.

“When it comes to emerging markets, China is by far the most important for global investors because no other emerging markets have the scale that it does,” he said. “It determines global concern.”

Greatest Weight

At the same time, not all economies are reliant on China, giving its impact greater weight for some than others.

China’s influence is concentrated on the assets of those it trades with or which rely on it for growth, said Khiem Do, head of Asian multi-asset strategy at Baring Asset Management in Hong Kong. That includes Australia and some of its Asian neighbors, said Do, who helps oversee about $60 billion. China’s weight in emerging-market indexes also means such measures can sway when the nation’s outlook shifts, according to Do.

Meantime, the prospects for developed nations have strengthened even as China’s expansion has slowed in recent years.

“The Chinese economy has been decelerating over the past few years and that has not prevented the S&P 500, or the European or the Japanese stock markets from hitting highs,” Do said. “They’re all flying.”

Emerging Stocks

By contrast, emerging-market stocks have had the worst start to a year since 2009, a performance that worsened on Jan. 23 with the China flash PMI release, which also sent industrial metals extending declines in London and rubber in Tokyo erasing gains. The MSCI Emerging Markets Index lost about 6.6 percent this month, as of 11:35 a.m. Tokyo time.

“It caught a lot of attention this month, whereas sometimes it can be overlooked,” said Andrew Kenningham, senior global economist at Capital Economics in London. “It fed into a story people were concerned about anyway in slowing emerging markets.”

Emerging markets are facing stresses from political unrest to current-account deficits to, in Argentina’s case, a run on the currency. India, Turkey, Brazil and South Africa all raised interest rates this month to help shore up confidence in their exchange rates.

State Enterprises

China’s government-sponsored PMI has stronger representation of large companies and state-owned enterprises that serve the domestic market than the one prepared by Markit and HSBC, according to Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong.

The government-backed survey covers 3,000 companies in 31 industries on 12 topics, including production volume, new orders, export orders and inventory. The index is seasonally adjusted. HSBC and Markit compile data from replies to questionnaires sent to purchasing executives in about 420 manufacturing companies. Their preliminary, or flash, PMI is based on 85 percent to 90 percent of responses.

“Whenever the flash HSBC PMI comes out I would say ‘ok, what happens to the official PMI?’” said Kuijs, a former World Bank economist. “Does it tell the same story or does it move in a more modest fashion?”

Reading Signs

The existence of two indexes can make China PMI readings difficult to interpret, said Kenningham, a former U.K. government official.

Capital Economics puts “more weight on HSBC/Markit because it’s more representative of the economy as a whole, while the official leans toward larger and more state-owned companies,” he said.

China’s share of global GDP has jumped to 14 percent from 4 percent in two decades, according to Michala Marcussen, global head of economics in London at Societe Generale SA. The country this month claimed the title of the world’s biggest trading nation in 2013, passing the U.S.

Even as its economy slows, China will drive demand in 2014 for use of ships to transport dry-bulk commodities such as iron ore, coal, grain and bauxite, Michael Bodouroglou, chairman and chief executive officer of Athens-based Paragon Shipping Inc., said in an interview this month.

The Baltic Dry Index, a measure of costs to transport commodities by sea, fell 3.9 percent on the day of the flash PMI, according to the Baltic Exchange in London.

As China grows in global importance, its impact on markets will also increase, Gaud of Edmond de Rothschild Asset Management said.

“The next step is the liberalization of the currency and when you get capital controls lifted, then China will become a heavyweight,” he said. “China is slowly becoming more and more important, and can eventually be on par with the U.S.”

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