China: NBS PMI Below 50 Confirms Renewed Weakness

• The NBS manufacturing PMI declined below 50 in November, in line with the HSBC manufacturing PMI released last week. Hence, both China’s manufacturing PMIs suggest renewed weakness in the Chinese economy. While the HSBC PMI suggests that the weakness has been largely driven by weaker domestic demand, today’s NBS PMI suggests that the weakness has to a larger degree been driven by weaker exports.

• Based on the weak manufacturing PMIs, we will have to lower our GDP forecast for Q4 11 and Q1 12. We now also expect a more forceful policy response from the People’s Bank of China (PBoC) in the coming months. We expect the reserve requirement to be cut by another 150bp, and while the likelihood of an interest rate cut is increasing, we do not expect this at the current stage.

Details:

China’s NBS manufacturing PMI declined from 50.4 to 49.0 in November (consensus: 49.8, Danske Bank: 49.0), confirming the renewed weakness that was evident in the flash estimate for HSBC manufacturing released last week. In the final estimate released today, the HSBC manufacturing PMI for November was revised lower to 47.7 from 48.1 in the flash estimate. New orders in November dropped from 50.5 to 47.8. In contrast to the HSBC manufacturing PMI, the NBS survey showed a significant drop in export orders from 48.6 to 45.6. That said, there is a lot of seasonality in the export order component in the NBS manufacturing PMI. Export orders tend to decline in Q4 after the Christmas restocking season in retail sales. However, even adjusting for this seasonality, there appears to have been weakness in export orders in November. Hence, compared with the HSBC survey, the NBS survey suggests that the recent weakness in the Chinese economy has to a larger degree been driven by weaker exports.

Assessment & outlook:

Based on the November manufacturing PMIs, we will have to lower our GDP forecast for Q4 11 and Q1 12. The current level suggests GDP growth in Q4 11 will be below 6.5% q/q AR – slightly lower than in Q3 11. Hence Q4 11 will be the fourth quarter in a row with GDP growth below trend. Due to continued deterioration in the new order-inventory balance, it is possible that China’s manufacturing PMIs could continue to decline, but we think they will start to recover in Q1 12 on the back of stronger domestic credit growth. While GDP growth should start to recover in Q1 12, we will have to lower our current 9.6% q/q AR forecast. On the other hand, it now looks increasingly likely that growth in the following quarter could be stronger than assumed in our current forecast.

Based on November’s manufacturing PMI, we expect the policy response in China to be more forceful in the coming months. We now expect PBoC to cut the reserve requirement for commercial banks by another 150bp following yesterday’s 50bp cut, see Flash Comment – China: PBoC cuts reserve requirement by 50bp (two 50bp cuts in Q1 12, one in Q2 12). The likelihood of an interest rate cut is increasing, but so far we maintain our view that interest rates will not be cut. Some easing of fiscal policy could also be on the cards – probably a higher priority on construction of social housing, which has been below the government’s target so far in 2011. The next important event will be the government’s annual work conference usually held in mid-December. Here, decisions will be taken on the most important goals and direction in economic policy for 2012.