China is overheating on the backs of massive property speculation, needless infrastructure building, and rampant credit growth. In spite of that inflation, HSBC’s China flash PMI points to contraction.

HSBC’s China “flash” Purchasing Managers’ Index fell to a 28-month low of 48.9 in July, down from 50.1 in June, marking the first time the guage has indicated a contraction since July 2010. The preliminary version of the PMI output index also showed further deterioration, dropping to 47.2 in July from 49.8 in June. HSBC economists said the PMI data seemed to indicate an industrial-production rebound seen in last month’s data was temporary. “We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through,” said HSBC economist Hongbin Qu. HSBC’s final version of the PMI is due out at the beginning of next month.

China Overheating

MarketWatch reports China should tighten further, IMF says

The International Monetary Fund on Wednesday said China should continue to withdraw stimulus in part to combat risks of higher-than-expected inflation.

In its annual review of China’s economy, the IMF directors “saw room for further tightening of monetary conditions” and suggested “greater reliance on interest rates and nominal exchange rate appreciation.”

In addition to possible inflation risks from food supply shocks, the IMF staff said China also faced the risk of a possible property bubble and a decline in credit quality in the lending undertaken to protect the economy from the financial crisis.

The IMF board repeated its recommendation that China should allow its currency, the yuan, to strengthen further.

China’s representative at the IMF, Jinxiong He, had the rare opportunity to rebut the report. He disagreed sharply with the suggestion that the yuan was below fundamentals, saying the staff analysis is based on a flawed benchmark.

The Chinese official also complained that the IMF did not mention that the U.S. Federal Reserve’s quantitative easing had fueled inflationary pressures and constrained options regarding the policy mix.

The IMF seriously understates the the Chinese property bubble, credit bubble, and risk of a Chinese economic implosion.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List