China: Surprisingly resilient in light of substantial slowdown in investments

In China the flash estimate for the HSBC/Markit manufacturing PMI in October improved to 50.4 (consensus: 50.2, DBM: 49.9) from a final reading of 50.2 in September. The details were a bit weak with new orders declining marginally to 51.4 from 51.5 and export orders declining to 52.8 from 54.5. The finished goods inventory component in October also increased to 50.1 from 49.2. Hence the new order-inventorybalance deteriorated in October, suggesting that there will still be moderate downward pressure on the manufacturing PMI in the coming months.

That said, the Chinese economy has been surprisingly resilient in light of the substantial slowdown in credit growth and investment demand in recent months. The explanation is that so far the weaker domestic investment demand has been partially offset by stronger export growth and resilient private consumption. The positive spin on recent Chinese data is that China at the moment is able to rebalance its economy without a substantial slowdown in growth.

Looking ahead there still appears to be some moderate downward pressure on China’s manufacturing PMI but risks are starting to look more balanced. There might be some downward risk from weaker exports. On the other hand, the downside risk from the property market appears to be declining at least near term. Press reports from China suggest that sales of new homes rebounded in October after some of the restrictions on home purchases have been eased recently. This suggests that the property market will subtract less from growth in the coming months.

With signs that the government’s targeted easing measures are starting to have an impact, there is now also less pressure on the Chinese government for more substantial easing measures like an interest rate or reserve requirement cut.

In Japan the flash estimate for the JMMA/Markit manufacturing PMI also improved to 52.8 (consensus: 51.7) in October from 51.7 in September. The details were strong with new orders surging to 55.1 from 52.3 and export orders improving to 52.6 from 52.2. In line with other recent data including yesterday’s foreign trade data, it suggests that growth in Japan is again picking up pace after disappointing growth in Q2 and Q3 in the wake of the consumption tax hike in April.