China's Official Manufacturing Index Crashed from 50.0 to a Record Low of 35.7 In February 2020


Tuesday, March 03, 2020 /  02:37 PM / FBNQuest Research   / Header Image Credit:  CNBC


The value of purchasing managers- indices (PMIs) as forward-looking indicators has been proved by the light they throw on the impact of the coronavirus. China's official manufacturing index crashed from 50.0 to a record low of 35.7 in February, and its non-manufacturing counterpart still lower, to 29.6.


The Caixin/Markit manufacturing index slumped from 51.1 to 40.3 last month. These may remain record lows because February bore the brunt of the control measures imposed by the government at the end of the extended Lunar New Year.


The IMF has acknowledged that its forecast of 6.0% growth for China this year, made in its World Economic Outlook update in January, will have to be revised downwards in the light of the virus. A recent poll of analysts showing consensus growth of 4.0% y/y for Q1 2020 also looks dated.


The Fund has already trimmed its forecasts for some countries such as Nigeria.


China is Nigeria's leading source of merchandise imports. It provided 31.3% of the total in Q3 2019 although probably more representative market shares are the 18.7% it achieved in 2017 and 19.4% in 2018 (full years). In the event of faltering supplies, Nigerian business could import from alternative markets. Motorcycles from India would probably be a good example.


China is also a leading supplier of infrastructure finance in Nigeria. Projects span from roads and railways to airport terminals and hydroelectric dams. Exim Bank of China is the second largest non-market external creditor of the Nigerian government after the World Bank Group. For reasons of prestige and long-term strategy, we would be very surprised by any halt to financing.


The greater pressure points for Nigeria in our view, however, are the oil price (negative) and US interest rates (likely positive). The 2020 budget assumes an average crude price of US$57/b, and we have seen several times how a low price for an extended period undermines exchange-rate arrangements. OPEC and its allies are currently scheduled to meet in Vienna this week, and will be under some pressure to extend and deepen their quota cuts.


The FOMC next meets in mid-March, and its “appropriate” agenda will be to consider (at least) further easing.


The Chinese statistics board was quoted at the weekend as saying that more than 90% of larger companies would have returned to production by the end of this month. To add some anecdotal evidence, the two Chinese retail parks owned by an international operator have now reopened.


Finally governments, particularly those that are accountable to voters, have to err on the side of caution in their response to such crises. The electoral cost of being found to have been underprepared would be huge.


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