To the extent that one can rely on PMI data, the July readings for both the manufacturing and non-manufacturing PMIs are suggestive of some near-term stabilisation in China economic activity. That bodes well for July activity data due for release from later this week. However, tighter credit conditions indicate the risk to growth is still to the downside.
manufacturing PMI rose from 50.1 in June to 50.3 in July. That was ahead of market expectations and
defied recent declines in the more narrowly defined HSBC index. The key sub-indices of production, new orders
and employment all rose, albeit modestly.
The non-manufacturing PMI also rose, coming in at 54.1 for July following
three months of declines that had taken the index down to 53.9 in June. That particular index however needs to put in
a more concerted effort if it is to break out of its recent trend decline.
result in particular suggests some stabilisation in activity. The production index came in at 52.4, up from
52.0 in June. That suggests some upside
to growth in industrial production in July.
The latest IP reading was 8.9% for the year to June. And while we think retail sales will improve
in July, at least in nominal terms due to higher inflation, we think fixed
asset investment will have drifted lower again.
In terms of exports, we expect growth to move higher from the disappointing
-3.1% in June.
There are a couple
of significant opposing forces for China growth in the second half of the
year. Tighter credit conditions suggest
further downside in investment.
Manufacturing investment will remain especially weak given still high
excess capacity; we think that story still has further to run. On the upside, we think exports will be given
a helping hand by stronger US and Japanese growth, and the expected
stabilisation in activity in Europe in the second half of the year. However, the recent strength in the RMB will
be a constraining factor.
We believe the
authorities will continue to “tweak” policy rather than deliver any aggressive
stimulus. Employment indices in both
PMIs suggest some stability in the labour market; an important consideration
for policy action. And input price indices
in both surveys also rose suggesting higher inflation, or at least slower PPI
deflation, in the period ahead. At this
point I’m still happy with my calendar year GDP forecast of 7.6% although risks
are still biased to the downside.