China's official manufacturing PMI released by China's National Bureau of Statistics (NBS) in August declined to 51.1 (consensus: 51.2, DBM: 51.2) from 51.7 in July broadly in line with expectations. The HSBC/Markit manufacturing PMI released in its final version this morning declined to 50.2 (revised down from 50.3) from 51.7 in July. For both manufacturing PMIs this is the lowest level since May. The development in the NBS manufacturing PMI is broadly consistent with the development in the HSBC/Markit manufacturing PMI that has been more volatile in recent cycles.
The details in the NBS manufacturing PMI were relatively weak. New orders declined to 53.2 from 54.2, while export orders declined slightly to 50.0 from 50.8 in July. That said, new orders remain relatively resilient in the NBS manufacturing survey. In the HSBC/Markit manufacturing PMI orders declined to 51.3 from 53.3 in July.
The finished goods inventory component in the NBS manufacturing PMI increased slightly to 48.1 from 47.6 and hence the new order-inventory-balance deteriorated slightly in August. However, in both manufacturing PMIs the deterioration in the new order-inventory-balance has been modest and the level remains relatively healthy. Hence, the new order-inventory balance does not suggest a marked decline in the manufacturing PMIs in the coming months.
Today's NBS manufacturing PMI confirms that the Chinese economy again has lost some momentum and the manufacturing PMI appears to have peaked unless monetary policy and fiscal policy are eased substantially soon. So far our view has been that the manufacturing PMIs would peak in September/October around 52. The peak appears to have come a bit earlier. For that reason there is now also downside risk to our GDP forecast (Q2: 8.2% q/q ann., Q3E: 9.0% q/q ann., Q4E 7.8% q/q ann.).
In our view there are three possible explanations for the recent weakness: 1) continued weakness in the property market, 2) the impact from fiscal stimulus has started to wane with infrastructure spending showing signs of slowing in July and 3) the accelerated corruption campaign in recent months could have started to weigh on investment demand.
The manufacturing PMI is expected to continue to decline slightly in the coming months. If the manufacturing PMIs move below 50 in the coming months, an interest rate cut can no longer be ruled out, even though the Chinese government has been reluctant to use monetary stimulus and has preferred fiscal stimulus instead. The arguments are that 1) credit growth was very slow in July, 2) house prices are now declining and 3) inflation at 2.3% y/y is substantially below the 3.5% y/y threshold and could decline further. The possibility of a more substantial easing move should limit downside risk to the Chinese economy.
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