The Chinese manufacturing sector has been contracting for seven months in a row. The HSBC Flash Manufacturing Purchasing Managers’ Index, an early indicator based on the responses of 85-90% of the total survey sample for the final PMI data which comes out later, is 48.7 for the current month. Any reading below 50 signifies a contraction from the previous month.
That the Chinese economy is slowing is not news, although the Shanghai Composite Index did weaken a bit after the Flash PMI came in.
Far more interesting is a comparison with the HSBC India Manufacturing PMI, as seen in Chart 1. We don’t have flash PMIs for India so the data for May is still not out. But, in sharp contrast to the Chinese PMI, the Indian manufacturing sector has been well in expansionary territory. Indeed, the PMI numbers show that conditions have improved since October-November last year.
Has this far better PMI performance been reflected in the stock markets? The MSCI India index, in local currency, was up 4.34% this year, as on 23 May 2012. In contrast, MSCI China was up a mere 0.44%. The relative performance is mapped in Chart 2. In local currency, therefore, the recent superior performance of the Indian economy seems to be mirrored in the stock markets. The picture doesn’t change even if we take a longer time period. In fact, over the past one year, the returns from MSCI India, in local currency, have been –11.84%, compared to –19.88% for MSCI China. Even if we take the last five years, the annualized returns for MSCI India have been higher, in local currency, than for MSCI China. And that has happened despite the political uncertainty, the high inflation, the high interest rates and the policy paralysis in India on the one hand and the expectation that the Chinese authorities will ease policy if growth slows too much on the other. That’s saying a lot.
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But it’s a very different story if the performance is to be measured in US dollars. Year-to-date, till 23 May 2012, the returns from MSCI India in USD have been -1.22%, while MSCI China is up 0.46%. In spite of India’s comparatively better recent economic performance, the returns for foreign investors have been higher in the Chinese market. But that is solely because of the effect of rupee depreciation.
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