China PMI boosts economy bulls
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China PMI boosts economy bulls

Export-driven emerging economies such as China have been feeling the strain as the eurozone crisis continues to play out. But strong FDI numbers and a revised economic policy have fed optimism that China can avoid a hard landing and rebalance its economy.

Domestic stimulus policies and still-resilient foreign direct investment (FDI) flows should help to offset sagging demand for Chinese exports, analysts say, as calls grow for Beijing to boost domestic consumption.

On Tuesday, HSBC's  flash manufacturing PMI (purchasing managers index) data boosted equity markets, with the index at a five-month high, though still in contraction mode. The figures in June provide some solace for investors, after showing  export growth in China fell to 11.3% from 15.3% in May, as the economy grew at an uninspiring 7.6% in the second quarter– the slowest pace in three years.

China's stimulus policies after the Lehman disaster boosted industrial and domestic consumption, but corporate activity during the past year has contracted amid the eurozone crisis.

“Current data show that, so far this year, order books [for all export companies on average] are down by 20 to 30% on last year," says Montgomery Ho, managing director and head of commercial banking, HSBC China.  "This is a trend that cannot continue, but companies have options open to them. They can consolidate, reduce employee numbers and enter new markets. But the critical point is whether or not they have enough time to implement various money-saving measures.”

Companies especially feeling the pressure are renewable energy businesses that have seen orders drop as a result of the lacklustre export market, exacerbated by German and American subsidies, which aim to promote the sale of domestically produced renewable energy goods.

Exports to Europe are taking a dive, but European corporates are expanding their businesses to places such as China, which “remains one of the regions where internationally based corporates can find growth”, says Ho. “Indeed, western corporates are looking to develop regional markets in Asia to tap into various networks of potential growth.”

European healthcare and pharmaceutical companies are flourishing in China, thanks to its ageing population and growing demand for prescription drugs. Last year, Sanofi, the French pharmaceutical research and development company, completed the acquisition of BMP Sunstone, a Chinese consumer health company, for $520.6 million.

“International healthcare and drug companies will continue to flourish in China despite the global economic slowdown,” says a senior banker of an international bank based in Shanghai. “More M&A on this front will inevitably come.”

Data released by the ministry of commerce in China highlights that FDI levels into China totalled $12 billion in June, down 6.9% on 2011. However, in a media briefing on July 17, ministry officials were bullish that China will see a steady expansion of FDI this year.

Policymakers are hoping that additional stimulus measures put in place by Beijing to stabilize economic growth and boost domestic consumption will offset export losses. And after the fallout of the 2008/9 global economic crisis, businesses in China are on a much better footing to absorb losses in international trade flows, say analysts.


Since 2010, the central government has pushed through various policies to encourage domestic consumption, and are continuously introduced to offset contractions in exports. In February and May, the People's Bank of China cut reserve requirement ratios, and June and July saw official interest rates lowered twice in a bid to encourage economic growth and stabilize the economy.

And to offset the weakness in renewable energy exports, the Chinese government plans to accelerate solar installations in China after 2015, boosting domestic usage from 21GW in 2015 to 50GW by 2020.

However, even with these measures, the full effects are yet to be seen. “Although we are yet to see a large amount of corporate failure, the supply chain is definitely under pressure," says Ho. "It’s too early to relay what the consequences might be.”

Nevertheless, government policy since the last crisis seems to be helping. “Most companies are prepared after the experience of 2009," he says. "The majority of corporates’ balance sheets are healthy.”

Li Wei, economist at Standard Chartered in Shanghai, says: “The eurozone crisis has made it clear that China, like other emerging markets, can no longer rely on its export-led economy. This is something that has been on the government’s radar for a while, but it serves as a prominent reminder it is crucial China diversifies its economy now.”

Nevertheless, doubts about the reliability of Chinese economic data, the indebtedness of state-owned enterprises, and vanishing consumption in Europe and the US have added to the bearishness over China's near-term macroeconomic prospects.

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