China PMI slowdown is needed: Russell

At first blush it's all too easy to see the latest evidence of an economic slowdown in China.

At first blush it’s all too easy to see the latest evidence of an economic slowdown in China as signs that a hard landing is becoming more of a risk. But the drop in the HSBC flash Purchase Manager’s Index(PMI) to show industrial output is barely expanding is exactly what the Chinese authorities want.

The developed world should be pleased as well as the moderation in the world’s fastest-growing major economy means commodity prices are likely to stall around current levels for the rest of the year. This in turn will lower inflation and give the global economy a chance to strengthen what has become an increasingly parlous recovery from the so-called great recession.

It is also too easy to look at the headline number from the flash PMI,which fell to 50.1 in June,the lowest in 11 months. That looks worrying indeed,especially in the context of Greece’s slow spiral to what is likely to be a debt default,even if the politicians try to call it something else,and a loss of economic momentum in the United States.

CHINA STILL GROWING

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However,China’s industrial output is still growing at 13 percent year,its oil demand growth was 8.3 percent in May,it’s importing coal and is likely to start buying more copper in the second half as stockpiles are depleted. So a modest slowdown in industrial activity is what can broadly be described as a good thing.

What’s the last thing anybody wants to see happen in China? A hard landing that cuts demand for commodities and leads to a renewed round of weakness in the rest of the world. What constitutes a hard landing? The consensus among several analysts seems to be if gross domestic product slipped to a 5-6 percent annual growth rate. On the other hand,a soft landing is said to be growth of around 8-9 percent. But China’s growth was 9.7 percent in the first quarter,so there is quite a long way to drop before you even get to the soft landing scenario. If the PMI can remain in positive territory,that should be enough to slow annual growth closer to the level that ensures the soft landing.

WATCH OIL PRICES

The drop in the flash PMI was a factor in crude oil declining today in Asian trading hours,along with a stronger dollar. The wall of worry facing the global economy in the form of a softer China and the U.S. and European debt woes is probably driving oil more than fundamentals currently.,This is,however,a good thing as it ensures that New York Mercantile Exchange benchmark WTI may find it hard to rally back above $100 a barrel in the short term.

Demand is strong enough to prevent oil from slipping much below $90,so the questions becomes is an oil price of around $90-$100 just the right medicine for both China and the rest of the world? The answer is probably yes,and the world economy may yet get its Goldilocks ending to 2011,not too hot or too cold.

Byline: Clyde Russell