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Chinese Manufacturing Increase

Stocks around the world responded favorably to the announcement of the first Chinese manufacturing increase in more than a year. A Chinese manufacturing increase may tell us that prospects for investment in China are positive. On the other hand, at least part of a Chinese manufacturing increase will come from sales by this export driven economy. Thus a Chinese manufacturing increase tells us that Chinese manufacturers are filling orders from customers around the globe. Since half a year ago when we wrote about a weak Chinese manufacturing report, the European economy has worsened while Germany and the United States are coming slowly but surely back to recovery. The report, issued by HSBC, is a purchasing manager’s index much like the ISM report in the USA. An index below 50 implies contraction of the sector while an index above fifty indicates expansion. The Chinese index rose from 49.5 to 50.3 in the last month.

Stimulus in China

China has used economic stimulus by the government to support its lagging manufacturing sector over the last few years since the onset of the 2008 recession. Interest rates have been kept low and the government has poured money into infrastructure projects. Chinese economists predict a rise in economic growth into the eight percent range. An optimistic read of the situation is that China specifically and Asia as a whole are in the recovery phase of a traditional recession. If fundamental analysis of the Chinese manufacturing increase is consistent with a routine economic cycle it could well be time to buy Chinese manufacturing stocks. As with the USA and Europe, investors are well advised to watch what happens as government stimulus tapers off and the Chinese manufacturing sector must grow on its own.

Bull or Bear on Chinese Stocks

Despite a generally favorable response to the announced Chinese manufacturing increase, the composite index of stocks fell on the Shanghai market. This may be a matter of buying on anticipation and selling on the news. Over the long term a major issue for China is the ability of the world to buy more and more Chinese products. Europe had been China’s number one customer. Now, as the Euro Zone lingers in debt and recession Chinese industry needs to look elsewhere for customers. Raw materials are always a concern for a growing industrialized economy. As China extends it political as well as its economic clout, it hopes to secure customer bases as well as access to raw materials. However, as the USA found out over the years, being perceived as the country with all of the power and money puts a nation in a different light. The political as well as economic cost of buying favors and getting access to raw materials as well as markets can become costly and become a burden on those at home. If you are investing in foreign stocks, Chinese stocks certainly deserve a look. But, remember Japan at the end of the 1980’s. The nation seemed to be set to take over the world. Then a set of handshake, good old boy, loans was disclosed and the Japanese economy went flat line for over a decade. China is still not a transparent society. The apparent Chinese manufacturing increase sounds good but just how good is the data? Investors in China are advised to constantly do their homework and check their results.

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