Chinese Manufacturing Data Set to Buoy 2010 Markets

As the new trading year begins we'll be looking for strong signals from the Chinese economy that its expansion continues. 2009 was a huge test for the Chinese economy as the world tested the theory that it was nothing more than the manufacturing sector for western consumerism. Without spewing out consumer goods to the rest of the world, analysts said that the Chinese economy could not survive.

A series of clever policy initiatives including asset purchases, lower taxation and breakneck expansion of the money supply has helped see China through a tough patch, at the same time as major economies struck down by the aftermath of the  mortgage meltdown.

As those world economies struggled to cast off the chains of indebtedness, the Chinese economy managed to get off its feet. Its domestic industrial and manufacturing sectors began to suck in huge volumes of raw materials in order to build out infrastructure and satisfy returning domestic demand.

This game a massive boost to commodity prices at a time when the impact was magnified by a slumping dollar. Suddenly investors started to buy-in to the theory that the Chinese success story had a firmer foundation than mere export-led success.

The China Federation of Logistics and Purchasing (CFLP) said on Friday that its nation's manufacturing sector powered up to a 20-month high during December. Its purchasing mangers index grew to 56.6 from 55.2 in November indicating ongoing expansion. If China's manufacturers continue to report readings above 50, which marks expansion, it will mark a whole year of expansion giving both locals and interbnational economies something of an extended fillip.

Within the recent data, not only was the monthly pace of expansion the fastest since March 2009, but also the forward looking indicators confirm better times ahead as opposed to a peak in domestic activity. The weak spot was indeed orders for new exports, which froze for a second month. This is likely to mean that Chinese authorities will show extreme reservation in taming its stimulus measures in the face of a possible lack of international demand.

Seventeen of the 20 industry classifications with the data showed expansion and suggest a broader-based outlook for grwoth ahead. China has moved from a near standstill one year ago to almost double-digit growth by the end of 2009, dragging demand for commodities in its wake.

The latest data is an encouraging start to 2010 and one which is likley to help maintain the double trends in place at the end of 2009: Bonds will continue to decline while equities will march forward.

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 Tyche Research

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