The flash estimate for Markit/HSBC manufacturing PMI in January declined more than expected to 49.6 (consensus: 50.3, DBM: 50.3) from a final reading of 50.5 in December 2013. This is the third month in a row with a decline and HSBC manufacturing PMI is now is at its lowest level since July last year.
The details were also weak. New orders in January declined to 49.8 from 51.6 while new export orders declined only marginally to 49.0 from 49.1, suggesting that the renewed weakness in January was primarily driven by weaker domestic demand. Inventories of finished goods also increased markedly in January with the finished goods inventory component increasing to 51.3 from 49.5. Hence, the new order-inventory balance deteriorated substantially and unlike December we now have a relatively clear signal that the HSBC manufacturing PMI should continue to decline in the coming months.
Today's Markit/HSBC manufacturing PMIs suggest that the Chinese economy has again started to lose momentum. In our view, the slowdown is largely a response to the de facto monetary tightening the People's Bank of China (PBoC) has been doing since mid-2013 and is largely driven by weaker investment demand. The decline is overall consistent with our view that China's growth was poised to slow in H1 14 on the back of tighter monetary conditions but the larger-than-expected decline in January nonetheless suggests increasing downside risk.
The manufacturing PMIs are expected to continue to move lower in the coming months but we do not expect a severe slowdown, so we would be surprised if the Markit/HSBC manufacturing PMI moves markedly below 48. China's exports will remain supported by recovery in Europe and the US and the recent decline in inflation leaves room for PBoC to gradually ease monetary conditions a bit again. That said, the Chinese government's attempt to control financial risk and rein in local government lending and at the same time secure reasonable growth in 2014 will be a very difficult balancing act.
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