China Manufacturing PMI Confirms Renewed Deceleration‏

China’s official manufacturing PMI released by China’s National Bureau of Statistics (NBS) in June declined to 50.1 in June from 50.8 in May in line with expectations. New orders declined to 50.4 from 51.8 while export orders dropped to 47.7 from 49.4. On a positive note, inventories continued to decline in the NBS survey and the NBS survey continues to show a healthy new order-inventory-balance.

The HSBC manufacturing PMI in June in its final reading declined to 48.2 (revised slightly lower from 48.3 in the in the preliminary flash estimate) from a final reading of 49.2 in May. In general the HSBC manufacturing PMI paints a weaker picture of the Chinese economy than the NBS manufacturing PMI. New orders in June dropped to 47.6 from 48.7 while export orders plunged to 44.9 in June from 49.9 in May. In the HSBC survey inventories continue to increase and the new order-inventory balance is much unhealthier than in the NBS survey.

In general the sample used in the HSBC manufacturing survey is believed to be more biased towards smaller private companies that are typically more dependent on exports while larger state-owned companies are represented in the NBS survey.

The manufacturing PMIs in June confirm that growth in China is slowing although the two surveys’ message about the severity of the slowdown varies. Some media headlines this morning attribute the weakness in the PMIs to the liquidity crunch in the Chinese money market. However, both manufacturing surveys show that weakness has been more pronounced in exports than in domestic demand. The possible negative impact from the liquidity crunch will probably only gradually become evident in the coming months.

Looking ahead we expect the manufacturing PMIs to continue to edge lower in the coming months to around 47 as slower credit growth starts to weigh on domestic investment demand. We expect year-on-year GDP growth to ease to 7.0% y/y by end- 2013 from currently 7.6% y/y. This will probably not be enough to force a major fiscal and monetary easing but the reserve requirement for banks might be cut if money market rates do not start to normalise soon.

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