Continued from Part 3
China’s July PMI was more than a disappointment—it was a confirmation of weakness
The Services PMI showed some encouraging strength from the inflation point of view. Unfortunately, this strength may prevent the government from enacting some kind of stimulus.
The government of China (FXI) had mentioned that stimulus would focus on consumer spending, so strength in this sector both from increased activity and higher inflation would mean consumer spending remains resilient.
Inflation signals strength
The input price index, which is the cost that service providers pay for labor and other expenses, showed a mild expansion. The panelists mentioned that higher salaries and purchasing prices were the drivers.
The output prices, on the other hand, showed a minimal decrease for the third month in a row. In this case, the lower prices were an attempt by service providers to attract new clients.
And to further highlight the resilient strength in the services sector, the expectations index—which measures the expected business activity over the next twelve months—showed a decent bounce from its value in June.
While the index is now almost at 60, this is significantly below the series historical average. Nonetheless, a value of 60 still reflects optimism.
Don’t forget the big picture
While the Services PMI may offer some ray of light in China’s (FXI) dark prospects, the majority of the macroeconomic data point towards worsened economic conditions. Even if the government announces some kind of stimulus, investors will have to review how it will target the stimulus to assess the effect it may have on the economy as a whole.
Plus, China has been brewing a potentially large credit crunch as well as a real estate bubble, so the downside currently outweighs the upside.
More From Market Realist
- China’s PMI confirms severe Asian weakness (Part 1)
- China hints at potential stimulus, but will it follow through? (Part 1)
- China hints at potential stimulus, but will it follow through? (Part 2)
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- Budget, Tax & Economy