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CHINA

By InvestSMART · 31 Dec 2011

By InvestSMART ·
31 Dec 2011

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CHINA

Manufacturing still struggling

China's manufacturing contracted for a second month in December, as global growth faltered and Premier Wen Jiabao prolonged a crackdown on speculation in the housing market.

The index was 48.7 in December, HSBC Holdings and Markit Economics said. That compared with a preliminary result of 49 reported on December 15 and a final reading of 47.7 for November. A reading above 50 indicates expansion.

The central bank may cut lenders' reserve requirements before a Lunar New Year holiday starting on January 23 that will fuel demand for cash, according to Bank of America Merrill Lynch. Last month's half percentage-point reduction indicated that the government is putting a focus on supporting growth as inflation cools.

"Weakening external demand is starting to bite," said Qu Hongbin, a Hong Kong-based economist for HSBC.

The Shanghai Composite Index was up 1 per cent yesterday, buoyed by signs of strength in the US, after the world's largest economy reported rising home sales.

INDIA

Growth slows after rates rise

Prime Minister Manmohan Singh failed to win passage of his anti-corruption bill, the latest disappointment for Mr Singh, whose championing of free-market policies two decades ago helped India become the second-fastest growing major economy. A failure to contain inflation and a reversal on foreign investment has sapped confidence in his administration.

Economic growth is slowing after the central bank raised interest rates by a record pace. India's economy grew 6.9 per cent in the three months to September 30, the weakest since the second quarter of 2009.

The central bank's campaign has had little impact, with the benchmark wholesale price index climbing 9.1 per cent in November from a year before, compared with the 9.5 per cent pace at the start of this year. By comparison, China's inflation rate was 4.2 per cent in November. The rupee has weakened about 16 per cent against the dollar this year, Asia's worst performer, as an exodus by investors sent the Sensex index of stocks down 23 per cent, more than the 18 per cent drop in the MSCI Asia Pacific Index.

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Frequently Asked Questions about this Article…

What does China’s manufacturing PMI reading of 48.7 in December mean for investors?

A PMI of 48.7 (below the 50 expansion threshold) means China’s manufacturing activity was contracting in December — the second month of decline. For investors, that signals weaker industrial demand and could weigh on Chinese stocks, exporters and commodity-linked assets until activity shows signs of recovery.

How could a cut in China’s lenders’ reserve requirements affect markets and everyday investors?

The article notes the central bank may cut reserve requirements before the Lunar New Year to boost cash in the system; a recent half percentage-point cut showed policymakers are focused on supporting growth. More liquidity can help banks lend more, potentially calming markets and supporting economic activity, which may be positive for stocks and credit-sensitive sectors.

Why did the Shanghai Composite rise about 1% despite China’s manufacturing weakness?

The Shanghai Composite was up roughly 1% because it was buoyed by signs of strength in the US — specifically reports of rising US home sales. In other words, positive overseas economic news can offset local weakness and lift Chinese markets at times.

What is meant by ‘weakening external demand is starting to bite’ and why does that matter to investors?

That quote from an HSBC economist refers to falling foreign demand for Chinese-made goods. For investors, weaker external demand can hurt export-oriented companies, depress industrial activity and put pressure on markets in economies reliant on exports.

What’s happening in India’s economy and what should investors know about the slowdown?

India’s growth slowed after a series of rapid interest-rate hikes; GDP grew 6.9% in the quarter to Sept 30 — the weakest since mid‑2009. The slowdown, persistent inflation and policy setbacks (like the failed anti-corruption bill) have sapped investor confidence and contributed to portfolio outflows and market weakness.

How have India’s interest-rate hikes affected inflation and market performance?

Despite a record pace of rate rises, India’s benchmark wholesale price index was still climbing (9.1% in November), showing limited immediate impact on inflation. The combination of high inflation and rate hikes has coincided with a weaker rupee and a sharp fall in the Sensex, indicating stress for markets and investors.

How big were currency and stock-market moves in India this year according to the article?

The article states the rupee weakened about 16% against the dollar this year — the worst in Asia — and investor outflows helped push the Sensex down about 23%. By comparison, the MSCI Asia Pacific index fell roughly 18% over the same period.

What indicators should everyday investors watch based on the article’s coverage of Asia?

Watch China’s manufacturing PMI and any central-bank moves (like reserve requirement cuts), inflation trends in China and India, US economic cues that can influence Asian markets, and currency and equity flows (for example rupee moves and Sensex performance). These signals can help investors gauge growth momentum and market risk in the region.