I briefly read the HSBC China Manufacturing PMI, and while it showed a positive reading, I am not so sure how this can be viewed as immediately positive. It is a mild uptick from a long run of negative readings, and well within the range of movement that is just as likely to signify continued weakness as recovery. But, the bigger picture at the moment is the more important picture and all short term data is meaningless without its context.
And the bigger picture is China’s over dependence on investment led growth, at a time of weakness in the world’s developed export markets, and the way it skews the growth dynamics going forward. I have previously pointed out that with up to 50% of growth coming from investment, ratios and measures such as debt to GDP have to be interpreted differently, and given the importance of return on capital invested to future growth, excess investment of the Chinese magnitude impacts both growth and debt dynamics negatively. A debt to GDP ratio for a country highly dependent on investment led growth is totally different from the same ratio for a better balanced economy.
Why am I raising this issue today? Well FT’s Alphaville have penned a blog on a report by George Magnus of UBS, entitled Magnus on China’s Investment Cliff, that deals with this specific issue. I would read it. I would also read Professor Michael Pettis’s blog on China, China Financial Markets for what I consider to be the preeminent take on the weakness of China’s growth model.
China’s debt/investment led growth dynamics are key to understanding its economic potential and risks over the next 5 to 10 years, and by virtue of this, the growth dynamics of global trade and developed economies.