Thursday 2 April 2015

China Growth Momentum Slows, But Some Businesses Aren’t Scared

In World Economy News 02/04/2015

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Judging by the latest PMI data out of China, growth momentum in the world’s No. 2 economy has slowed. Nomura Securities in Hong Kong is forecasting growth to fall below 7% in the first quarter and then down to 6.6% in the second. Deflation is a real threat, according to the People’s Bank of China . But some businesses aren’t phased by it.
So China is going to be a six-percenter. What? Me worry?
“Absolutely not worried about it,” says Ravin Gandhi, CEO of GMM Nonstick Coatings, a chemical company that helps keep your eggs from gluing to your KitchenAid saute pan. He has a factory in Zhuhai, a city in Guangdong province. Small, by Chinese comparisons, at just under a million people. He employees around 200 of them.
When asked if China growing at 6% worried him, he chuckled.
PMI data beat consensus on Wednesday. The Deutsche X-Trackers China (ASHR) rose over 2.3% in mid morning trade. Despite slower growth, some industries doing better than others thanks to the domestic consumer.

PMI data beat consensus on Wednesday. The Deutsche X-Trackers China (ASHR) rose over 2.3% in mid morning trade. Despite slower growth, some industries doing better than others thanks to the domestic consumer.
“I laugh because there is so much talk about doctored numbers, and can you really trust the data from afar. Here’s what I can tell you on the ground,” he says. He works from the company’s Chicago office, but is in China every quarter. “Our customers that make pots and pans for all the major U.S. brands used to have 1,000 employees. About 15 years later, they have 15,000 employees. They’re not going to go to 30,000 employees, and they might even shrink back. But the point is, I am always amazed at how fast things can move in China. For companies that have scale, those manufacturers aren’t thinking: man, I’m just going to hitch my wagon to the U.S. market. They are turning inward. And in this business, home goods, that is really just getting started.”
Portfolio managers are at least marginally excited about China. After the U.S., portfolio managers say China is the next best market, according to a global sentiment survey conducted by the CFA Institute.
China data continues to unimpress.
Official PMI ticked up to 50.1 in March from 49.9 in February, beating consensus estimates of 49.7. The improvement was mainly seen in the PMI for large firms, as Gandhi points out, rising by 1.1 percentage point to 51.1 in March, in contrast to those for medium-sized and small firms that are down to 48 and 46 respectively. Anything under 50 means a contraction is in place.
Meanwhile, the input price index rebounded to 45.0 from 43.9 in February. This should help to ease deflationary pressures, though it also points to a potential squeeze on profit margins, which could hurt labor markets.
“At least from the PMI survey responses, China’s labor market seems to be weakening,” says Bill Adams, senior international economist with PNC Financial Services PNC -0.79% in Pittsburgh.
Chinese policymakers have stated that macroeconomic policy now targets full employment, rather than a specific rate of real GDP growth. Beijing is not a fan of unemployment.
And that is because, less we have forgotten, China is still a poor country. Like the U.S., not everyone lives in Soho and Bel Air. While stories of Chinese shoppers gawking of the latest Michael Kors handbag make the news, Chinese consumers are also furnishing homes, and improving their diets. That trend has is still in place. Slower growth can be at least partially blamed on weaker exports and a decline in fixed asset investments in things like real estate and roads.
“We employee people who years ago were migrant workers who’d go home maybe once or twice a month to their villages,” says Gandhi. “I know them personally. Today they have their wife, and their children and their parents all moving into Zhuhai, It’s an absolute boom town that no one’s heard of. There are Irish pubs, Mexican restaurants and there are a lot of people here, including foreigners,” Gandhi says.
Domestic consumption growth is averaging around 12% per year, but Gandhi says he’s forecasting a compounded annual growth rate of 20% over the next five at GMM.
“I see China as having a nascent and burgeoning entrepreneurial culture that’s going to do this country good for many years,” he says.

Source: Forbes