Deeper Slump in China’s Manufacturing, Will Bad News Become Good News?

Fresh from Bloomberg,

China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, adding to evidence the nation’s economic slowdown is deepening, a government report showed today.

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg News survey of 24 economists. A reading above 50 indicates expansion.

Today’s data increase the odds Premier Wen Jiabao will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan said on June 29.

“The weaker reading should trigger more-aggressive policy easing,” Sun Junwei, a Beijing-based economist with HSBC Holdings Plc, said before the release. “Economic growth will rebound to over 8.5 percent in the second half once these additional easing measures filter through,” she said.

Steps may include a reduction in interest rates, four cuts in banks’ reserve requirements, more fiscal spending on public works and tax cuts, according to Sun, who forecasts second- quarter economic growth may have slid to 7.8 percent from a year earlier, after slowing to 8.1 percent in the first three months of the year.

When I say bad news is good news, I am talking about the mind conditioning of the financial marketplace. Basically market participants have been programmed to expect of a Bernanke Put or automatic backstops from governments, particularly from central banks, as reflected by this statement “increase the odds Premier Wen Jiabao will introduce more stimulus”.

The problem is that China’s political authorities remains tentative towards aggressive interventions so far.

The compromise at the EU summit seems to have temporarily put a floor on the Shanghai index, last Friday. But this comes after a technical break down in spite of the repeated assurances by politicians and the media.

And one important thing that many people don’t seem to realize: rescues and bailouts policies are unsustainable, they cannot and will not be self-perpetuating.