As China sees slowdown pressure, watch the government’s words

Market Realist

Dry bulk investors' eyes and ears are on the Chinese government (Part 6 of 8)

(Continued from Part 5)

Signs of a slowdown

Manufacturing activity has slowed down. There were signs that China’s economic activity was going through a soft period in a slowing growth trend over the past few weeks, as manufacturing PMI (purchasing managers’ index) indicated.

Manufacturing PMI hits a low

Investors can think of the manufacturing PMI (purchasing managers’ index) as a sentiment index. It tracks labor market, new orders, production, delivery speed, and raw material inventory conditions in the manufacturing industry from purchasing managers’ perspective. These are widely considered to be leading indicators of a country’s future economic activity, and the market pays attention.

February data of 50.2, which was reported at night on February 28, 2014 Eastern Time, was lower than January’s 50.5, but just above market expectations of 50.1. Generally, rising figures are positive and falling figures are negative, but as long as figures are above 50, the market’s perception is that China will continue to expand.

What to look out for

Fundamentally, China trekked along fine for the past few quarters, even as overall manufacturing PMI only floated around 50. Whenever the manufacturing PMI fell quite a bit lower, the government would support the economy by switching to pro-growth policies. The difference between new orders and production PMI has narrowed quite a bit (as the chart above shows), which we see as a sign that downward pressure is building—like it did throughout 2008, 2011, and 2012.

If new orders and production PMI continue to slide together in March, the fundamental outlook for China, the Guggenheim Shipping ETF (SEA), and dry bulk stocks like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM) would be increasingly negative. With the economic growth target set at 7.5% for 2014, the government might have to do something to jolt the economy a bit if manufacturing activity continues to languish. Look for cues as to what policy the government will conduct to support that 7.5% growth at the end of the National People’s Congress set to end on March 13, 2014.

Continue to Part 7

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