On Saturday the Chinese government and private surveys released more numbers showing that the country’s economy was slowing.
In September growth in China’s manufacturing sector stalled after 15 months of expansion, according to the Caixin/Market Manufacturing Purchasing Managers’ Index. The PMI for the manufacturing sector fell to 50.0 in September from 50.6 in August. (In PMI surveys 50 separates expansion from contraction.) Economists polled by Reuters had forecast a reading of 50.5. The Chinese government’s official PMI fell to 50.8 in September from 51.3 in August. Economists surveyed by Bloomberg were looking for a reading of 51.2. (The major difference between the Caixin/Markit survey and the official index are that the Caixin/Markit survey includes more small, private companies.)
As you might have expected in the middle of a U.S.-China trade war the subindex for new export orders fell to 48. That’s the fourth consecutive month of contraction and the lowest reading since 2016. Employment in the manufacturing sector, a highly sensitive political measure, fell.
At the same time, not all the news was negative for China’s economy. The official non-manufacturing PMI picked up to 54.9 as domestic demand for services and construction remained strong.
Predictably the Shanghai Composite Index rose on Monday, climbing 1.06%.
Why “predictably”? Wouldn’t you think Chinese stocks would drop on this news?
Worries about a slowdown in the Chinese economy have hung over the stock market in Shanghai for months. Those fears have indeed been the key driver behind the bear market in Chinese stocks.
But today’s news solidifies the market’s belief that the government will move to support the economy with the market currently expecting stimulus from the People’s Bank and from government spending will hit the economy and the stock market in the fourth quarter.
From that perspective, today’s “bad” news is actually “good” news.