Flemming J. Nielsen
Danske Bank A/S
In China, the flash estimate for HSBC/Markit manufacturing PMI in November declined a bit more than expected to 50.4 (consensus: 50.2, DBM: 50.2) from a final reading of 50.4 in October. This is the lowest level for the HSBC/Markit manufacturing PMI since May.
On balance, the details were positive with new orders improving slightly to 51.4 from 51.2 but export orders declined to 50.5 from 51.7. Inventories was also cut at a faster pace in November with the finished goods inventory component declining to 49.8 from 50.3 and the inventory of input purchases declining to 47.9 from 49.2 previously. Hence, the new order-inventory-balance improved in November but remains at a relatively neutral level.
The slight improvement in new orders despite the decline in export orders suggests that domestic demand held up relatively well in November. This is consistent with the hard data for October where there were tentative signs of stabilisation in domestic investment demand. However, export orders appear to have a lost a bit of momentum in recent months, suggesting that slower global growth has started to weigh. Hence, downside risk for the Chinese economy in the short term appears to have shifted more towards external demand.
Looking ahead, we expect weaker global manufacturing activity to continue to exert moderate downward pressure on China’s manufacturing PMIs in the next few months. We expect a slight improvement in late Q1 15 as both global growth and domestic demand starts to improve. However, overall, we expect the manufacturing PMIs to stay within a narrow range of around 50 as they have done in recent years. This suggests an economy moving sideways with continued downward pressure from a structural slowdown in growth.
In terms of policy, the message is status quo, meaning an easing bias in monetary and fiscal policy but China sticking to its current policy of modest targeted easing measures without a cut in the leading interest rates or the reserve requirement.
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