Monday, August 5, 2013

Good PMIs in China, but growth risks still biased to the downside

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.

The official 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.

The manufacturing 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.