Current China slowdown pales to 2008 crisis: Fitch

A close look at the HSBC Flash PMI index shows it has declined but not as severely as the last recession.

The HSBC Flash PMI index, which is widely considered as a weather vale for the Chinese economy, fell to 48.1 in June, from 48.4 in May this year with the most recent reading of above 50 observed in July 2011.

Fitch compared this to how the index dived from 53.3 to 41.8 between July and November in response to the global financial crisis, and concluded that the current decline "is not as severe as that in 2008."

As a result, Fitch expects milder policy responses to the prevailing sluggish performance, including a more managed debt and credit expansion.

Here's more from Fitch:

The current economic slowdown in China, illustrated by the fall in the HSBC Flash PMI index to its lowest level this year, is not comparable with the much sharper slowdown of late 2008, and is likely to lead to a milder policy response than that enacted in 2009, Fitch Ratings says.

A widely watched indicator of the prospects for the Chinese economy, the HSBC Flash PMI index fell to 48.1 in June, from 48.4 in May. The most recent reading above 50 was in July last year. But the decline is not as severe as that in 2008, when the index went from 53.3 to 41.8 between July and November in response to the global financial crisis.

We already anticipate a slowdown in Chinese growth. Our forecast for Chinese real GDP growth in 2012 remains 8.0%, below the 2007-2011 average of 10.5% per year. We revised up our forecast for 2013 to 8.2%, from 8.0%, in expectation of a modest policy stimulus in the second half of this year.

We do not anticipate as aggressive a response to the current slowdown as that in 2009, which initiated a rapid expansion of the amount of debt in the Chinese economy. The pressure for this debt to move on to the sovereign balance sheet is reflected the Negative Outlook on our 'AA-' Local-Currency IDR.

This is partly because the labour market is stronger than it was in 2009, and partly because we expect the Chinese authorities to be mindful of the risks associated with a further rapid expansion of credit. Policy will be eased only gradually to avoid stoking inflation and house prices.

Nevertheless, we do expect stimulus to be deployed to head off a spill-over from the global economy into domestic demand. There is some room for both fiscal and monetary stimulus. A sharp fall in inflation, to 3% year on year in May from a peak of 6.5% last July, preceded the People's Bank of China's 25bp policy rate cut earlier this month. Meanwhile, our projected budget deficit of 1.1% of GDP this year leaves scope for further fiscal stimulus. This policy flexibility is one reason why we think China has the potential to avoid an economic "hard landing" although this remains a possibility.