Thursday’s manufacturing PMI suggests increasing downside risk, but we do not believe that the Chinese economy has entered a new prolonged cyclical deceleration phase, as leading indicators have remained relatively resilient in recent months. The data will not be enough to force new stimulus from the Chinese governmen,t but with inflationary pressure also subdued the Chinese government now probably has an easing bias.
Details
The flash estimate for China’s HSBC manufacturing PMI in May declined to 49.6 (Cons: 50.54, DB: 50.4) from a final reading of 50.4 in April. The details were also relatively weak. New orders in May declined to 49.5 from 51.2. In addition finished goods inventories in May continued to increase, and the new order-inventory-balance remained fragile, suggesting we could continue to see some weakness in the coming months. On a positive note, export orders appear to have stabilized, with the export order component improving slightly albeit staying just below 50.
The finished goods price component continued to decline in May, suggesting price pressure is easing substantially and there is little inflationary pressure in the pipeline.
Assessment & Outlook
Today’s HSBC manufacturing PMI indicates that the fragile Chinese recovery has lost some momentum, and the weakness is increasingly driven by domestic demand and not primarily exports as in the previous month. While the details suggest that the near-term outlook remains weak, we do not believe that China has entered a new prolonged cyclical deceleration phase. The leading chart indicators have remained relatively resilient, although they appear to have peaked. Our view of the Chinese economy for the rest of the year is an economy that is largely moving sideways, with GDP growth around 8% q/q AR. That said, the HSBC PMI suggests increasing downside risk. It will not be enough to force an imminent stimulus response from the Chinese government, but we are now moving in the direction of an easing bias. Should GDP growth start to move towards the government’s critical 7.5% target, we will probably see a policy response. The implication for the FX market might be that China would halt the recent appreciation of CNY.
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