China Stands Out Amid Weak Asian Data

By
RICHARD SILK
and
MICHAEL S. ARNOLD
BEIJING—China’s factory sector showed signs of stronger growth Monday, while weak economic data from a number of other Asian nations underscored the impact of a recent selloff in emerging-market assets.

Agence France-Presse/Getty Images
China’s factory sector showed signs of stronger growth Monday, while India and Indonesia showed strain from a recent selloff in emerging-market assets. Above, a worker welds steel in a factory in Huaibei, in north China’s Anhui province.

The reversal of capital flows from emerging markets, as investors anticipate higher U.S. interest rates, has hammered the economies of nations like India and Indonesia that rely heavily on foreign investment.
China has fared better, in large part because of restrictions on capital flows that have protected the yuan currency. “There’s definitely some dichotomy” in the data between China and many other economies in Asia, said Vishnu Varathan, an economist with Mizuho Corporate Bank.
On Monday, the HSBC purchasing managers’ index came in at 50.1 in August from 47.7 the month before, back above the crucial 50 mark that separates expansion from contraction. That came after China’s official manufacturing PMI, released Sunday, hit a 16-month high of 51.
These numbers added to a series of better-than-expected data for China’s economy in July, including exports, industrial output and fixed-asset investment, confounding pessimists who expected growth to slow in the second half of the year.
China’s gross domestic product grew 7.6% on year in the first half, at its slowest pace in years, and some economists expect a worse performance for the remainder of 2013.

The HSBC PMI showed modest improvement in several areas, including higher backlogs of work to be done and lower inventories of finished goods, a sign that production lines are running closer to full speed. Input costs were up for the first time since February, as global prices for commodities like crude oil and iron ore staged a rebound. That may help stem persistent falls in prices for China’s industrial goods.
One weak spot was export orders, a disappointment at a time when it seems the European and U.S. economies may finally be recovering.
“China’s manufacturing sector has witnessed a rebound,” said Capital Economics, a macroeconomics research company. “It still appears though that the recovery is credit-fuelled and investment-driven, which raises questions over how long it will last.”
The data from the rest of Asia was unremittingly glum.
Indonesia posted its largest trade deficit on record, widening to $2.31 billion in July from $847 million in June and much larger than economists’ expectations of $350 million. Fuel imports surged to meet the demand for travel ahead of Muslim Eid ul-Fitr holidays in early August.
Emerging markets with large trade deficits, like Indonesia, India, Turkey and Brazil, have been most exposed during the current emerging markets selloff as they are reliant on capital inflows into stocks and bonds to finance those deficits. Those flows have been harder to attract amid investor expectations the U.S. Federal Reserve will cut back on its massive bond-buying program later this year, pushing interest rates higher.
Indonesia’s economy is facing headwinds from all directions. Efforts to curb imports, such as increasing the luxury tax on imported pre-assembled cars and branded products, have failed to narrow the trade deficit. The nation’s economic growth has slipped below 6%, its slowest pace in three years, as China’s demand for its commodity exports has ebbed.
But inflation has continued to be a problem due to weakness in the rupiah currency, which has fallen 13% against the dollar this year. That forced the central bank to raise interest rates by 0.5 percentage point to 7% at an emergency meeting last week, likely further crimping growth.
Inflation data released Monday showed consumer prices in July rose 8.79% on year and 1.12% from the previous month, its fastest pace of growth in more than four years. The data is likely to heighten calls for further rate hikes to support the rupiah.
A host of other purchasing managers’ indexes from across Asia also made for grim reading Monday, a further sign that turmoil in emerging markets is taking its toll on manufacturing activity.
HSBC’s manufacturing PMI for Indonesia fell to 48.5 in August from 50.7 in July, a 15-month low and the fourth straight month of decline.
The bank’s manufacturing PMI for India in August fell to 48.5 from July’s 50.1, its first time in contraction since March 2009. That is well below a long-term average of 55.4.
India, too, is facing a massive trade imbalance, slowing growth and the specter of rising inflation, which have led to large losses for its rupee currency. “The situation does look like it’s knocking up against stagflation,” Mizuho’s Mr. Varathan said.
HSBC economist Leif Eskesen said the PMI, which is an early sign of economic activity in a month, signaled the worst wasn’t over for India’s economy, which grew 4.4% in the April-June period, its slowest pace in 4½ years.
“The August reading was grim,” Mr. Eskesen said. “Coupled with the July reading it seems clear that the economy is continuing to slow and that last week’s April-June GDP number was not the bottom.”
—I Made Sentana in Jakarta contributed to this article.
Write to Richard Silk at richard.silk@wsj.com and Michael S. Arnold at michael.arnold@wsj.com
A version of this article appeared September 2, 2013, on page A10 in the U.S. edition of The Wall Street Journal, with the headline: Factory Pace Rises In China.

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