China and Asia Lag on Manufacturing Front

Germany, France and all of the EMU are on six-year highs for manufacturing. The EMU reading is at an all-time high from the late-1990s when the series originated. There are very few weak readings in absolute terms even so the strength in relative terms (queue rankings) may be overstated, especially in Asia.

Only five of the 14 readings in the table weakened month-to-month in December. They are the U.K., Brazil, South Korea, Malaysia and Indonesia. Among these, the U.K. reading is still quite strong with an 80th percentile queue standing. But of the three readings below 50 and indicating contraction, only Indonesia (at a 43rd percentile standing) has a truly weak queue positioning. South Korean has a 59th percentile queue standing and Malaysia has a 62nd percentile queue standing. Having firm or high queue standings on weak absolute readings is a sign of an economy that has been floundering for some time. China is an example for this with a weak 51.5 raw diffusion score that manages an 89.6 percentile standing.

The EMU, Germany and France manage raw diffusion scores in the high fifties or low sixties, the only countries/regions to do that. Taiwan at 56.6 has the best raw diffusion score in Asia.

Clearly the story here is that the West is coming out on top early in 2018. I have been saying this for a while, but it is true that I have a very unclear sense of China's focus in the wake of its party Congress meeting last year. China is getting big and strong and seems to be thinking that it can do whatever it wants. Yet, it is getting to the point that because it is so big its ability to control events is going to become more limited. China has played the debt card too often and it no longer packs the punch it once did. That is going to limits its flexibility. Yet, at the party, Congress China reaffirmed that it is a communist country. At the same time, it is lobbying WTO to have its market considered as a market economy since it does not want to be subject to third market tests for trade dumping and other unfair trade allegations. But of course, China is a communist country and its markets are nowhere near being competitive in the sense required especially not with so many state owned enterprises dotting the landscape and so much government-directed lending.

Will this be the year when China realizes that they call it a 'command economy' as a euphemism? When the economy was smaller, China could literally command it. At its current size, the economy has a life of its own and Chinese leaders are about to find out that they can cook the books on numbers if they so choose but they no longer can control how the economy performs with any degree of precision.

What we see in the PMI data is that in the West demand has recovered enough for manufacturing to rise somewhat broadly- remember that PMI data measure breadth, NOT strength. Western growth rates are only just topping 2% hardly a locomotive for global growth. Despite strong-looking PMI indexes, the rise in growth in the Western world has not been strong enough of buoy China and Asia along with it- nor will it be.

China really needs to stick with 'plan-A' and develop its services sector to grow domestic demand and build its growth on that. But to do so also means it also needs to pay workers enough to enable them to purchase goods and services to be a source of demand. And to do that is to undermine its competitive advantage in trade. So China has given this idea of a transition to services some lip service, but when push comes to shove China has been unwilling to give up the goose that has laid the golden egg of growth. Yet, the transition to services is essential because the markets in the West will never again drive growth in China as they did in the past. China is now too big and the finances in the West have been destabilized and must be rebuilt and that means no growth based on debt (or on ever widening trade deficits). China needs to see the handwriting on the Great Wall. Will that happen in 2018 or will 2018 be a year in which the lesson is learned the hard way?