COLUMN-China PMI not that strong, but may be good for commodities – by Clyde Russell (Reuters India – April 1, 2014)

Clyde Russell is a Reuters market analyst. The views expressed are his own.

LAUNCESTON, Australia, April 1 (Reuters) – China’s official Purchasing Managers’ Index for March probably isn’t as strong as it looks, but that’s likely not a bad thing for commodity demand in the next few months.

The National Bureau of Statistics (NBS) PMI rose to 50.3 in March from 50.2 in February, matching the consensus expectation and indicating that the factory sector expanded slightly in the month.

The official measure, which focuses more on large, state-owned enterprises, is somewhat at odds with the HSBC PMI, which fell to an 8-month low of 48 in March, its third straight month below the 50 level that separates expansion from contraction.

It’s likely that the HSBC survey is painting a more accurate picture of current conditions in China, given the NBS measure tends to be seasonally strong in March, as this is the first month after the Lunar New Year holidays, which this year straddled January and February.

Taken together, the two PMI surveys are showing a Chinese economy that has lost momentum and has had a soft first quarter.

So, how can this be positive for commodity demand in the next few months?

Because the market is betting that the Chinese authorities will return to the tried and trusted practice of stimulus spending, which tends to fall heavily into infrastructure such as railways.

This sort of spending ramps up demand for steel, copper and cement, and increased demand for those commodities in turn boosts consumption of energy and transport fuels.

Premier Li Keqiang has already provided signs that stimulus spending is coming, saying in a speech on March 28 that the government “will launch relevant and forceful measures” to counter a cooling economy.

Li specifically mentioned the experience of last year in battling an economic slowdown, suggesting that this year may follow the same template of ramping up infrastructure spending.

However, it is also likely that any stimulus will take several months for the full impact to be felt, meaning that economic indicators may remain soft for the second quarter, before accelerating in the third.


Stimulus spending should boost demand for iron ore and coal, especially if global prices remain weak.

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