China’s official PMI index fell from 50.5 in January to 50.2 in February, slightly better than consensus expectation of 50.1. All sub-indices bar one (suppliers delivery times) were weaker in February than January. As I said with the release of better-than-expected trade data recently it’s important not to read too much into the Chinese data at the start of the year as it can be quite noisy. That said the two most critical of the sub-indices, production and new orders, showed bigger declines than the overall index which shouldn’t be dismissed too readily.
Our forecast for China GDP growth this year
is 7.5% which is a modest deceleration from the 7.7% recorded in 2013. As you know
there are two critical and offsetting factors that will determine the growth
outcome in China this year; the extent to which higher export growth on the
back of higher global growth offsets the weakness in investment given the tightening
in credit conditions. Given our view that
higher exports would come later in the year, our expected profile of GDP growth
over the year is for it to start off soft and end the year modestly higher. The PMI data is certainly supporting the
first (and easiest!!) part of that story.
The other newsworthy development in China
has been the recent decline in interest rates and the exchange rate. Given the lack of transparency around the PBOC
its actions are open to debate and conjecture.
Given the weakness in some of the recent data those market movements
could be interpreted as an easing in monetary conditions to support
growth. Or worse, the exchange rate
appreciation could be seen as an abandonment of the leadership’s intention to
rebalance the economy.
I don’t think it’s either of those
things. Part of the intention to
liberalise financial markets is to allow a greater role for the market in
determining financial market prices. With
respect to the exchange rate, we think PBOC is simply wanting to introduce
two-way volatility into the exchange rate, leading eventually to a widening of
the trading band. That also helps send the message that CNY appreciation is not
a one way bet. We expect the CNY to continue
appreciating this year. Fundamentals support
continued appreciation with the current account still in surplus, although at
2.1% of GDP in 2013, it is much reduced recently. Also, continued Fed tapering and the
resultant reduction of capital inflows (and possibly outflows) will also limit
Another important part of the China story will unfold this week with the announcement of the official growth target for 2014. We expect it to remain unchanged from last year at 7.5%. While we dont think recent financial market developments are a concerted effort to ease monetary conditions, given benign inflation there is room to move on both monetary and fiscal policy should the China leadership become concerned about the growth outlook.