The China manufacturing PMI produced by Markit fell to 51.1 in May, down from 51.8 in April and the recent high of 55.6 in November 2010. It is now at its lowest level in 10 months. This release follows on from the surprise weakness in some of the April partial activity data released last week.
China is clearly slowing, but at this point we remain comfortable with a gradual slowdown to a soft landing rather than a sharper hard landing. In general, the data is consistent with our view of 9% GDP growth in 2011, although the PMI data does shift the balance of risks to the downside. If the PMI consolidates around this latest level we will likely shift that forecast down to 8.5%. The China slowdown is a real fundamental behind recent and expected future weakness in commodity prices, especially industrial metals.
This data supports our view of no further interest rate increases this year. Further exchange rate appreciation remains desirable, but this is more to do with the necessary rebalancing in the economy rather than the overall level of demand. China growth is still overly reliant on exports and investment and needs to rebalance towards consumption if growth rates are to be sustained at current levels into the future.