China’s PMI print doesn’t mean much - Financial Times

With the world transfixed on every single economic data point that crosses the wires at the moment, it was no wonder that many took to the internet this morning to proclaim wonder at China’s latest PMI reading.

For, after a terrible collapse in February to 35.7 — a record low — as the People’s Republic shut down to stop coronavirus, March’s figure came in at what optically looks like a pretty positive 52.

Cue the commentariat responding in positive terms. The Spectator’s editor Fraser Nelson, never one to shy away from an economic argument despite his publication’s questionable record, posted this on Twitter:

It wasn’t just the media punters though. Charlie Robertson, Global Chief Economist of Renaissance Capital said this of the print:

This is probably the most embarrassing statistic for the West that China could possibly release. Not only did China stop the virus with just 3,309 deaths, they also appear to have done it with just a one month shutdown of the economy. 

The problem is, that’s not what the number suggests.

Let’s begin with how a PMI is actually calculated. An organisation, such as China’s National Bureau of Statistics or IHS Markit, goes around asking businesses about whether various data points – such as orders, supply chain times and production – have improved, stayed the same or deteriorated since the question was last asked.

Based on the aggregate of those responses, a figure for a monthly index is compiled. The crucial mark of this monthly index is 50, which separates an expansion or contraction in activity – with those above 50, marking an expansion. 

The key point here is not that PMI is not an absolute figure such as GDP, but an indication about the economy’s direction of travel. Specifically, whether activity is improving or declining. 

Of course, we can infer that in a quarter where all the PMIs are way above 50, we are likely to see strong GDP growth. But the seesawing that we are seeing in China right now does not imply anything other than a very sharp contraction in output in the quarter. It’s worth remembering too that a reading of 52 after such a dismal month is hardly spectacular. It just means that activity for some fortunate firms is on the mend. 

As FT Alphaville’s close friend Frances Coppola explained on Twitter, think of it like the speed of a car.

If you’re travelling at 100 miles per hour and brake to a pace of 70 miles per hour, that’s a huge relative drop. Think of that like China’s PMI crashing to 35.7 in February from 50 in January.

However, you then gently tap the accelerator and your speed increases by 2 miles per hour. Now, that is faster relative to the slower speed you were just travelling at, but it’s nowhere near the speed-limit busting 100mph you were flying along at just a few moments ago.

That’s effectively what this Chinese PMI print is saying. Things are better relative to last month, but last month was awful. So things are still not great. Which tallies with what we know about the Chinese economy, right? Factories, cinemas and restaurants have tentatively reopened, but the country is still nowhere near running at full tilt.

So let’s just call this PMI print what it is — what we should have expected. For, as China’s National Bureau of Statistics said:

...[the reading] reflects that more than half of the surveyed enterprises have resumed work and resumed production, better than last month, but it does not mean that China's economic operation has returned to normal.

Quite.

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March 31, 2020 at 11:02PM
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China’s PMI print doesn’t mean much - Financial Times
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