• China’s HSBC manufacturing PMI in October improved from 49.9 to 51.1, suggesting that Chinese growth will improve in the current quarter. The details were also strong with both new orders and export orders improving markedly above 52 in October. Based on our forecast of some improvement in GDP growth in the current quarter, China’s manufacturing PMI should improve to the 52-53 range in the  coming months.
  • With growth improving People’s Bank of China (PBoC) is in our view unlikely to move to an easing bias, despite our expectation that inflation is poised to drop substantially in the coming months. However, in isolation the combination of improving growth and lower inflation in China could be positive for global risk sentiment in the coming months.

Details

The flash estimate for the HSBC manufacturing PMI in October improved to 51.1 (Danske Bank: 50.4) from 49.9 in October. The details were also strong with new orders improving from 49.8 to 52.1 and export orders improving markedly from 49.4 to 52.4. For new orders this is the highest level since May and for export orders it is the highest level since November last year. That said, the inventory component also increased markedly from 46.8 to 49.3 and for that reason the sales-inventory actually deteriorated in October despite the strong improvement in new orders. The improvement in the HSBC manufacturing PMI is also in line with the recent hard economic data. Although GDP growth for Q3 was slightly weaker than expected, the economic data for September were better than expected, suggesting that the Chinese economy started to improve in late Q3, see Flash Comment - China: GDP growth slows in Q3, but signs of improvement.

On a negative note, the output price component continued to increase albeit only slightly from 54.3 to 54.7. That said, the output price component is still far off its earlier highs above 66 reached in November last year and still suggests only modest inflationary pressure (see chart on next page).

Assessment & outlook

The improvement in the HSBC manufacturing PMI is consistent with our view that GDP growth will improve in China in the current quarter to around 8.5 q/q from 6.8% q/q AR in Q2 (based on our own estimate). If our forecast is right, the manufacturing PMI should improve to the 52-53 range in the coming months. In Q1 next year we think GDP growth will improve further and could be close to 10% q/q AR. In the short term the biggest risk to this scenario is the external development. However, with export orders improving in October HSBC manufacturing PMI does not suggest that this scenario is materializing at the moment. Particularly today’s manufacturing PMI does not justify the hard landing that both the stock market and the FX market appear to be pricing for the Chinese economy at the moment. For example the forward USD/CNY currently discounts a slight depreciation of CNY against USD over the next year.

Policy-wise the implication is that PBoC will remain on hold. With growth poised to improve and inflation remaining a threat, PBoC is in our view unlikely to move to an easing bias, even though we expect the year-on-year inflation rate to drop substantially in the coming months. Because we expect inflation to drop, we also expect the appreciation pace to ease slightly to around 3.5% annually from +5% over the past year. In the coming months the combination of stronger growth and lower inflation in China could support risk sentiment globally.