In November the official purchasing managers’ index for the manufacturing sector was back below the 50-point expansion threshold for the first time since February 2009, at 49 points. Compared with October this was a drop of almost 1½ points. The companies surveyed were particularly downbeat with regard to export orders. The corresponding sub-component tumbled by three points to stand at 45.6 – the Chinese economy is clearly feeling the heat of the global economic slowdown.
The Chinese central bank has already reacted to the further slowdown in the economy. Only yesterday it lowered the minimum reserve ratio for Chinese banks by 50 basis points with effect from 5 December. Further moves are likely to follow in the coming months. The government evidently intends to stimulate the economy by boosting lending. This instrument had proved highly effective in the wake of the Lehman collapse in September 2008. But it harbors considerable risk: The potential threat from non-performing loans is already likely to be considerable. If the banks are now again being prompted to expand their lending appreciably, this could ratchet up the risk potential for banks still further.
We believe the Chinese government will manage to prevent a hard landing. Growth in the fourth quarter 2011 is likely to ease to around 8.5% year-over-year, after 9.1% in the third quarter. Our estimate for average growth in 2011 remains unchanged at 9.3%.