When bad news is good news in China
A classic example of bad news on the economy being interpreted as good news by the markets
The HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) for China came in at a one-year low on Thursday, but the Shanghai Composite Index was up 0.36%. In fact, while the PMI, which is a gauge of manufacturing activity in the country, has fallen sharply from the heights it reached last July, the stock index has scaled new highs (see chart). Since last December, the PMI has been below 50 in four months, apart from a brief increase in February.
A reading below 50 implies contraction from the previous month, while that above 50 implies an expansion.
And yet, the Shanghai Composite Index is up by almost a third since the beginning of March. That is a staggering rise, underlying the expectation that the government cannot afford to let the economy drift any further and will do its best to boost growth. China has already loosened its monetary policy. This is thus a classic example of bad news on the economy being interpreted as good news by the markets.
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