A recently released figures for China’s economic outlook show cause for guarded optimism about China’s growth. This comes on the heels of many companies’ Chinese operations being cited as the cause for slowdowns in their business’ growth. To keep these projections in perspective it’s important to understand the indicators that are most important to different sectors.
China’s National Bureau of Statistics and China’ Federation of Logistics and Purchasing (CFLP) yesterday announced the Purchasing Managers’ Index (PMI), causing a huge buzz, as it shows a potential quickening of economic growth for certain sectors of the economy. The PMI is based on surveys of 820 purchasing managers in 31 industries. The newly released figures show the highest results in seven months, leading many to believe growth in China will pick up in the coming months.
This seems to fly in the face of some recent announcements by global companies with major operations in China, who have cited China’s sluggish economic growth as major reasons for lower projected growth in their Chinese operations. One such company, Yum Brands, recently saw a sharp decline in their stock price after exactly such an announcement.
This is a perfect example of how looking at certain statistics in isolation can be dangerous. Take the new PMI, which at 50.6 is just slightly above the 50.0 mark that is considered expansion. In the release by the CFLP yesterday, Zhang Liqun, a senior researcher at the Development Research Center of the State Council said, “Economic growth will continue to maintain a moderate rebound,” which was a sentiment shared by other analysts as well.
Lu Ting, chief Greater China economist at Bank of America Corp., said the growth for the fourth quarter is expected to rise to 7.8%, outpacing last year’s fourth quarter growth of 7.4%. Lu added, “It’s especially encouraging that the rise in the PMI was mainly driven by new orders, which suggests output will be further boosted in coming months.”
A Bloomberg survey of analysts and investors showed that 72% of respondents said they view China’s economy as either remaining stable or improving, and 53% said they are “more optimistic” about Chinese President Hu Jintao and his economic policies’ impact on the economy going forward.
With all these indications of increased growth in China, it would seem there should be unguarded positive outlooks all around, but the reality is each segment of the economy is not impacted equally by some of these indicators. This is why companies like Yum Brands and McDonald’s, while they are continuing to expand their Chinese operations, are showing lower growth estimates due to less favorable economic conditions that affect their industries. Executives at large multinational companies have teams of planners whose sole focus is analyzing economic data and constantly reforecasting the company’s future results. Investors and consumers alike should keep this in mind when evaluating any broad economic indicator.
It’s also very important to understand that what any analyst does, with respect to developing projections, is to try to use the best available information to make good decisions that can improve their businesses. It’s at once simple and complicated; so take economic indicators for what they are and don’t set aside your own common sense and judgment when evaluating any business information.