China: Decline in HSBC PMI suggests GDP growth could decline below 7% y/y in Q1

The flash estimate for China’s HSBC/Markit manufacturing PMI in March declined by more than expected to 49.2 (consensus: 50.5, Danske Bank Markets: 50.6) from a final reading of 50.7 in February. This is the lowest level for the HSBC/Markit manufacturing PMI since April 2014.

The details on balance were also weak, with new orders declining markedly to 49.3 from 51.2, while the export orders component improved slightly to 49.0 from 48.5 but remained relatively subdued. Inventories were cut at a faster pace with the finished goods inventory component declining to 49.7 to from 50.4 and the stocks of purchases component declining markedly to 48.0 from 51.4. Nonetheless, the new orderinventory balance declined in March, but has so far not deteriorated sharply.

The weak overall PMI suggests that the improvement in February was just a temporary ‘blip’, possibly related to the timing of the Chinese New Year holiday being unusually late in February. It also brings the HSBC/Markit manufacturing PMI more in line with the very weak industrial production data for January and February, albeit a substantial gap remains.

The poor PMI, in line with recent sluggish hard data, also confirms that the start to 2015 has been very wea\k. The data so far suggests that GDP growth could decline below 7.0% y/y in Q1 from 7.3% y/y in Q4 last year. Hence, the government’s 7% target for GDP growth in 2015 already appears difficult. We will have to cut our 7.2% growth forecast for 2015.

Policy wise, the implication in our view is more monetary and fiscal easing. We expect the leading interest rate to be cut by another 25bp in Q2 and the reserve requirement for commercial banks to be cut by 150bp in the coming months.

Weak Chinese growth is obviously particularly negative for commodity prices and emerging markets. Weak growth might also increase speculation that the Chinese government will eventually allow the CNY to depreciate to support growth, albeit the depreciation pressure on the currency has eased recently. However, we do not expect the Chinese government to start targeting a substantially lower CNY to support growth.