China's Slowdown Can No Longer Be Masked By Cooked Economic Data

As Friay's flash PMI numbers show, the declines in iron ore prices (discussed here) were indeed signaling an ongoing broad based slowdown in China's economy.

Bloomberg: China’s manufacturing may be contracting at a faster pace this month, signaling more monetary and fiscal stimulus is needed to secure a second-half rebound in economic growth.

A preliminary reading of 47.8 for a purchasing managers’ index released today by HSBC Holdings Plc (HSBA) and Markit Economics compares with July’s final 49.3 figure. If confirmed, it would be the lowest level since November and the 10th month that the reading has been below 50, the longest run in the index’s eight- year history.

This completely contradicts Goldman's analysis of China's manufacturing sector (discussed here). Friday's survey result is indicating a decline in production, new orders, and particularly new export business.

NYTimes: “The unexpectedly big drop more than reversed the gain seen in July,” Yao Wei, a China economist at Société Générale in Hong Kong, said in a research note. “A drop of this magnitude and a level significantly below 50 unambiguously spells trouble.”

The Chinese economy has been languishing for months, its domestic performance undermined by weakness in the important property sector and its export sector hit by sagging demand from overseas.

China's economy is not yet able to adjust to declining orders, as the momentum driven manufacturing apparatus keeps producing in spite of slowing demand. Inventories of unsold finished goods are piling up. When the required adjustment in manufacturing finally takes place, the economic growth will decelerate further.

NY Times: After three decades of torrid growth, China is encountering an unfamiliar problem with its newly struggling economy: a huge buildup of unsold goods that is cluttering shop floors, clogging car dealerships and filling factory warehouses.

The glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown. It has also produced a series of price wars and has led manufacturers to redouble efforts to export what they cannot sell at home.

The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.

In spite of these efforts to "adjust" economic data, today's PMI results, the declining raw materials prices, and the languishing stock market (below) are all signaling a growth correction that may end up rivaling that of 2009.