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China Manufacturing PMI Weakens Again…

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    May 26, 2012

    Defaults and Deferrals on Commodity Contracts:-

    The Financial Times reports China buyers defer raw material cargos

    Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.

    The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices.

    A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.

    China’s economy grew 8.1 per cent in the first quarter from the same period of 2011, the weakest rise in nearly three years but still pointing to a so-called soft landing.

    Fantasyland Scenario

    Pray tell how or why does any of this portend a soft landing?

    The next two paragraphs are more realistic.

    Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.

    Soft commodities such as soybeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said.

    China Manufacturing PMI Softens Again, In Contraction For 6 Months

    China shows modest deterioration in operating conditions during May according to HSBC Flash China Manufacturing PMI.

    Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

    Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption.

    As long as the easing measures filter through, China will secure a soft landing in the coming quarters.”

    “As Long As Pigs Have Wings”

    The question of the day is: How does Markit find these perpetually bullish clowns every month for every country?

    Here’s my “as long as” thesis: As long as pigs have wings, they will fly.

    I am amused that the vast majority of economists still have not figured out that pigs don’t have wings and neither does the China soft landing theory.

    For further discussion, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

    Mike “Mish” Shedlock
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    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.