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3 reasons why we shouldn't worry about China's poor economic reports

Bank of America Merrill Lynch's Ting Lu lists why China may be okay after all.

China silk market picEnlarge
People walk past a Century silk store in Beijing. (Wang Zhao/AFP/Getty Images)

Any way you look at it, the two Chinese manufacturing reports we just got were not great.

The official China manufacturing PMI index fell to 50.1 in June from 50.8 in May. This was right in line with expectations, but nevertheless reflects a sector that is just barely growing.

The unofficial HSBC PMI index fell to a 9-month low of 48.2. This sub-50 reading signals contraction.

While worries about China's economy had been lingering for quite a while, it was only in recent weeks that interbank lending rates spiked sparking fears of a liquidity crunch in the world's second largest economy.

But it would be a mistake to go as far as to think that China was doomed for a hard economic landing. Here's Bank of America Merrill Lynch's Ting Lu:

...The 50.1 PMI reading in June could also help convince policymakers to end the self-inflicted interbank liquidity crunch as soon as possible.

A key question is whether we should consider lowering our GDP growth forecasts (currently 7.6% for both 2013 and 2014; 7.7%, 7.6% and 7.6% for 2Q, 3Q and 4Q in 2013). At the moment, we do see more downside risks then before, but a downward revision is not justified yet for three reasons. First, the PBoC has already committed to ending the interbank liquidity squeeze and the State Council has come out asking for growth stability. Second, we expect the deleveraging of small banks in coming months to have a limited impact on system-wide credit supply as big banks could fill the gap. Third, pessimistic sentiment during the PMI survey around 20 June could also impact the survey results even the real economy could have been better.

Much of Lu's optimism hinges on the ability of China's leaders to navigate the economy in the right direction. Indeed, many have argued that the reason why rates are rising is because China wants to cool Chinese lending.

Is it cool enough?
 

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Original Source URL: 
http://www.businessinsider.com/dont-worry-about-chinas-weak-june-pmis-2013-6

http://www.globalpost.com/dispatch/news/regions/asia-pacific/china/130701/3-reasons-we-shouldnt-worry-about-china-economy