Monday, February 21, 2011

Flash PMI for China Falls

Momentum in China's manufacturing sector slipped to a seven-month low in February, according to the preliminary findings of a survey of mainland manufacturers compiled by financial services group Markit and HSBC Holdings, reports MarketWatch.

The Flash China Manufacturing Purchasing Managers' Index is now at 51.5, compared to 54.5 in January, HSBC said in a statement on Monday. A reading above 50 is still technically expansionary, but I generally don't read too much into exact macro numbers. I prefer to look at trends up or down (especially when the number is so close to negative territory)

Bottom line: It sure looks like China is headed for stagflation, i.e., a declining economy and inflation. Note, stagflation does not rule out the possibility of a crash of the Chinese stock market, indeed, it is likely. The term stagflation came about to contrast the Keynesian view that you couldn't have a downturn and price inflation at the same time.

With stagflation, you generally have a continuation of money printing, but not enough to support the previous structure of the economy that was created by previous money printing. This can lead, for example, to a crash of the stock market and economy, followed by a stagnant stagnant stock market and economy. But the concept that the term stagflation is trying to convey is that in opposition to the Keynesian belief you can have inflation and a poorly performing economy.

1 comment:

  1. Everytime an economy enters stagflation, a Keynesian loses his wings.