Chinese manufacturing slows as it feels the impact from Europe

2nd July 2012

The National Bureau of Statistics and the China Federation of Logistics and Purchasing reported Sunday that the official purchasing-managers index (PMI) fell from 50.4 in May to 50.2 in the month of June. A PMI reading above 50 indicates an expansion in manufacturing activity, while a reading below that indicates contraction.

"There is no question that China is feeling the impact from Europe, especially in the manufacturing sector," David Carbon of DBS told the BBC.

But even as China's economy shows further signs of slowing down, economists do not see major stimulus measures equivalent to the massive 4-trillion yuan ($629.6 billion) stimulus package it passed in the mist of the global financial crisis in 2008.

Although a worsening of Europe's sovereign debt crisis could prompt a much more aggressive response from China policymakers, a huge stimulus package will not be necessary because indicators such as fixed-asset investment, housing sales, bank credit and exports have stabilized, suggesting that recent monetary policies such as the cuts in banks' reserve requirement ratios (RRR), are already having an impact, writes CNBC's Jean Chua.

"In our view, Chinese policymakers recognize that if the euro zone breaks apart, it would not be a short-term development. Therefore, cyclical overreaction would have only limited benefits," Barclays' economists Huang Yiping, Chang Jian and Yang Lingxiu wrote in a report.

Instead, it might be better for China to accept slow growth and continue to focus on rebalancing and restructuring its economic model towards consumer driven growth. "Even if it becomes necessary for the government to do more to support growth, we believe it might launch a large program to train migrant workers, instead of undertaking more infrastructure projects," according to Barclays.

Meanwhile, Francesca Freeman and Sarah Kent write in the Wall Street Journal that any indication that China's economy is beginning to slow more than expected could be a nasty thorn in the side of the commodities sector, which is already under pressure from concerns over the euro-zone debt crisis and the U.S. fiscal situation.

The price of oil has slumped around 20%, while the price of copper has fallen 8.5% since the start of May through June 29.

"The biggest risk to commodities now is China, since problems in Europe have more or less been priced into the markets. What's not priced in is a hard landing in China," said Daniel Briesemann, a commodities analyst at Commerzbank. "People have been nervous about China for some months now, but the European debt crisis has overshadowed it."

Freeman and Kent go on to say that the inability to rely on China is leaving commodities in a more precarious position than they have been for over a decade.

"The possibility that the commodities markets won't be able to fall back on Chinese demand means that a further worsening in conditions elsewhere in the world will now likely have a serious and detrimental price impact. Investors are bracing for the worst."

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22 thoughts on “Chinese manufacturing slows as it feels the impact from Europe”

  1. Anonymous says:

    There is plainly a large danger that they would withdraw their money from the banks at this point.

    Indeed, but for rational investors that point was reached when the post-tax return on savings fell below the level of inflation experienced by those investors. Given that a large slice of those investors must be paying tax at 40%, there clearly is a large inertia effect here, or simply the lack of any available investments.

    I have great difficulty with the current interest rates. Of course it’s delightful for those with large debts, but did the BoE really have to go to such extremes? A base rate of 2% would be much more equitable between sectors of society. Many people with tracker and similar mortgages have had a very large gift from society, one that I suspect few would recognise. Small businesses, not all of which are on the ropes, have also had an indiscriminate subsidy. To ‘protect’ the few who overborrowed, all are being rewarded with the lowest interest rates in two generations. But every saver is being charged for this. I’m astonished that savers (who must by now know what is happening) put up with these clearly discriminatory policies. Not one peep of protest has been heard yet, and shortly it looks as if things will get worse.

    1. anteos says:

      b, there has been protests. Save our savers has been very vocal in trying to protect savers, even going along to the treasury select committee.

      the lack of support from any of the political parties has been shameful.

    2. Anonymous says:

      Hi barncactus
      You have picked on a level which is where I always thought that the liquidity trap began or around 2% interest rates. I believe that since then any gains from borrowers have been lost on the other side of savers and pensions and particularly sadly maybe more has been lost than gained.
      This is why if I got on the MPC I would be looking to put that right.

  2. DaveS says:

    Firstly the banks can’t lend because they would need more capital to lend and they are supposedly being threatened with increased capital requirements in the future.

    Secondly the banks are sitting on a stack of bad loans that haven’t been recognised and when they finally are it will further hit their capital.

    And what happened to the idea that the whole crisis was caused by too much debt ? That the banks had to de-leverage and shrink their balance sheets.

    We are constantly being told that businesses are awash with surplus cash that they are unwilling to invest due to lack of confidence. So Tucker really means he wants the banks to lend to consumers and really that means mortgage lending. They want to try and get house prices on upwards move again because this boosts consumer confidence and hence business confidence and then GDP grows and crisis is over. Its deja-vu all over again.

    I would like to say they are idiots but I am sure even they are capable of understanding all of this. But they have no idea how to create real growth so they are now resorting to desperate tricks to try to recreate fake growth based on excessive debt.

    No wonder I am pessimistic.

    1. max says:

      a PERFECT summary DaveS.

      The whole system is fatally broken.

      They can’t reduce house prices to affordable levels as the banks will go bust. But at these levels the loans made are dangerous and nobody can anyway afford them with inflation so high.

      1. forbin says:

        DaveS has made a good summary , but we are here because out illustrious leaders are ignoring the Big Debt issue

        yes its those darned Banks again

        they are bust , still bust and if ever we get a house price correction – be bust even more !

        but as I have often noted – governance of the people by the Banks for the Banks

        Really until that changes then nothing will


  3. ernie says:

    Thanks Shaun – the main point I took from your post was that the reduction in base rate from 5%, which happened now some years ago, has made no difference at all to borrowing appetites. Indeed, even in mortgage finance deleveraging is still going on. This indicates that all those who were willing to take on debt have already done so, since they were quite willing to do so at much higher interest rates (see 2008 crash). Therefore, the problem is not a lack of lending, it’s a shortage of credit-worthy borrowers. This situation has actually been exacerbated by the crisis, since a “batten down the hatches” mentality is now firmly set in. Those who could borrow due to their better overall credit position are not willing to do so. Continued measures which smack of crisis/panic will only serve to increase this tendency to stay under cover. Until and unless interest rates are raised to encourage proper investment of capital (not worthless stock speculation) this will not change. This may be counter-intuitive but I believe it to be correct.

    1. JW says:

      Hi Ernie
      I believe you are correct. But they are scared higher interest rates will cause defaults and bank collapses. They are paranoid about collapse of the entire financial system, banking and non-banking. So the policy is to ‘protect’ whats gone before rather than promote what can happen now and in the future. Consequently we have ‘zombie’ everything; banks, businesses, households, nations.

    2. Patrick says:

      I’d add that it’s not just a case of credit worthy borrowers, but that inflationary increases and asset bubbles have made everything bar consumer tech much less affordable.

    3. Anonymous says:

      Hi Guys
      If I can reply to all of you at once then as I have explained above to barncactus this is one of the reasons why I set out my stall a while back and would look to get base rates back to 2%. I have discussed in the past that I would have raised interest rates.
      However there would be a lot more to my strategy as just in one example i think that many credit card and overdraft rates are usury. So my plan would also involve reconnecting official base rates with actual interest rates that people get and pay.
      I intend to re-update on my plan to get us out of this mess soon but for now I will leave you with the thought that was too difficult for James O’Brien at LBC Radio to comprehend which is if cutting interest rates by 4.5% hasn’t worked why will cutting further suddenly succeed?

    4. Nico says:

      Correct. I fall into that category. I would be prepared to borrow significantly and pay a higher rate of interest than rates are currently if I believed the asset (a house) I would be acquiring was decent value. As it is I think the assets are being artificially propped up.

      1. Anonymous says:

        Hi Nico and welcome to my part of the blogosphere
        Unfortunately if we look at say the US stock market closing well above 1500 tonight on the S&P 500 we see that so many asset prices are (in my opinion) like that.

  4. Anonymous says:

    Currently paying 9.45 euros a month for a French bank account – this appears to be the going rate – offset by also having a savings account that pays interest at the end of the year.
    UK banks trying fees for premium accounts with benefits?
    BoE base rate still irrelevant for most people as you have pointed out many times eg credit card & payday loan rates

    I understand that in the USA that after foreclosure banks can not pursue mortgagees for additional money – perhaps if adopted UK banks would be more careful on home loans and we avoid excessive housing bubble?
    Housing still special case no capital gains on residence and buy to let rampant as pension alternative?

    1. Anonymous says:

      Hi Chris

      Thank you for reminding me that in some countries bank acounts do come with a fee. Every now and then they try to swing that in the UK too!

      It would appear that the housing and banking sectors are one inter-twined special case does it not?

  5. Robert S says:


    There’s two things I would love to know:

    1. Why do the banks deposit their money with the BoE every night? Surely, they’re banks in their own right? What do they thinks going to happen to it, and what makes the BoE more secure?

    2. Instead of negative rates, why can’t they do what they do to ISA account holders, and refuse to receive money over a certain amount? In The Telegraph article I was reading, they discussed how they would have have to allow, say, £1bn to be deposited with the 0.5% rate to assist the building societies, credit unions etc, and anything over £1bn there would be a negative rate. Damn sure if ISA savers can’t deposit their full amount, then banks can be made to do the same thing. Madness, I tell you, madness! And this fool is given a pension!

    1. Anonymous says:

      Hi RobertS

      1. It used to be that banks were required to hold money at the BoE when that changed it still likes them too as it helps it to implement monetary policy and in these times they like the security of it. The security comes at the end from the fact that the BoE controls the currency so can always repay £ debts and it has taxpayer backing too.

      Here are its views on this.

      “Reserve balances: current account balances held by commercial
      banks and building societies at the Bank. The Bank pays Bank Rate on reserve balances – a key part of the implementation of monetary policy. Reserve balances can be used by commercial banks to make payments and constitute a high quality liquid asset for them to hold. The sharp increase in reserves balances since March 2009 reflects the fact that asset purchases under the MPC’s policy of Quantitative Easing have been financed by increasing reserves balances.”
      Yep QE yet again….
      2. I need to think more about the Telegraph suggestion as on first sight it seems to be bound to be fiddled and circumvented.

  6. forbin says:

    Hello Shaun,

    indeed it would be madness to negative interest rate , so

    1, current BoE rate has made little difference to the lending interest rates

    2, what difference has been made had been to high deposit mortgages – now call me a fool if you like but as an average joe, very few people get these rates – maybe those but to pillage , sorry let , wallas but in the main it leaves the impression the bank lenders have factored in large deposits to cover a large house price correction ….. hmmm and you know I ain’t gonna borrow because I’m not that stupid and I think most others are thinking the same

    3, If it cost me money just to have a savings account , and this is where this applies as most have bank accounts and these have something of a utility worth, then expect a massive rush out of the banking system

    followed by us reversing the trend to have bank accounts/savings and going back to a cash economy

    think what that will do to VAT and business ….. the banks will need another bailout as well

    perhaps really someone , somewhere, will grown some and let these banks go bust…. then maybe we can then recover!


    1. Anonymous says:

      Hi forbin
      The last time something had to work like this we ended up with the word disintermediation which without the details means (unexpectedly of course..) it didnt…

  7. Rods says:

    Hi Shaun,

    An excellent analysis of what the fools at the BOE think.

    “Oh dear another mistake as we again review how such a gaffe prone individual has ended up with an index-linked pension worth around £5 million.”

    One rule for them and one for the plebs where the maximum private pension cap is being consistently reduced, and with the current rate of inflation will not provide an adequate pension for somebody who is 40 and plans to retire at 70. Now who are worth more to society, failed BOE officials or directors of world class businesses like Tesco, Rolls Royce, Vodafone etc.

    From 1982 to 2012, prices on average rose by 299% and an annuity for Joint life, 3% escalation taken at 70 is currently £4200/£100,000. Now after 25% tax free cash this leaves a pension of £39,375 with a estimated real value of £13,125. Nobody is going to live like a BOE Lord on this!

    This cap has been consistently reduced over the last 30 years as it was much higher when I started paying into a pension.

    1. Anonymous says:

      Hi Rods
      Thanks and I have been thinking about annuties but the recent rally in the Gilt market has briefly stymied me but it is on my mind. As to the pension rules I did do some work in that area and whilst for most of us the changes are out of out leagues there are issues.
      1. Long-term planning requires exactly that rather than annual fiddling.
      2. As you say some animals are more equal that others.

  8. economymad says:

    Good post Shaun, and great comment DaveS, I really have nothing more to add as you pretty much covered exactly what I was thinking.

  9. Paul C says:

    Great discussion thread from all, really covered all of the angles on interest rate manipulation. These policies are designed to protect the economic system as we know it, the banks of course but also the “historic” wealth of a generation of people.

    Principally the folk that were born in the 1950’s and who purchased properties in £5K to £75K price bracket and now own essentially the same bricks and mortar (but with uPVC windows and central heating) valued at £150K to £750K. So this is a generational “put”, of course there are the savvy BTL folk and serial doer-uppers who along with the generational cohort are very interested in preserving this status quo.

    The politician’s and banks together know that their future is tied to protecting this established way of working, Some retiree’s may complain about their poor saving returns however their £500k home asset provides a nice cushion and still a sense of personal success.

    Of course this does dis-enfranchise the young and unfortunate renters but I can only imagine that the aging cohort of established owners expect to subsidize their following generations from their “accumulated wealth” (or simply perhaps spend it on cruises in the Mediterranean sea).

    An economic reset that allows people to recognized for their actual economic contribution and re-establishes a fair cost of money (interest rates at 3-6 %) would be desirable from a human fairness perspective. Government & Banks have kept this show on the road since 2007 so you have to give these manipulators some recognition but it is clear that every week it is costing more in financial and non-financial measures.

    Let us wonder at how things may develop in 2013……

    Paul Chadwick BSc Econ

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