China: Slight improvement in HSBC manufacturing PMI suggests slowdown less severe than feared

The flash estimate for China’s HSBC/Markit manufacturing PMI in September unexpectedly improved to 50.5 (consensus: 50.0, DBM: 49.4) from a final reading of 50.2 in August. The HSBC/Markit manufacturing PMI is still off its peak at 51.7 in July, but today’s manufacturing PMI (unlike the very weak industrial production data for August) suggests that growth in manufacturing activity has only slowed moderately in recent months.

The details in today’s report were also relatively strong with new orders improving to 52.3 from 51.3 and new export orders improving markedly to 53.9 from 51.9 in August. For new export orders this is the highest level since March 2010. This suggests that exports in particular have contributed to the overall improvement in new orders in September.

The finished goods inventory component increased slightly to 50.0 in September from 49.4 in August. In recent months the new-order-inventory balance has deteriorated slightly but the overall level remains neutral and hence at the moment suggests neither a decline nor an increase in the HSBC/Markit manufacturing PMI in the coming months (see chart below).

Today’s HSBC/Markit manufacturing PMI must be regarded as very positive news as it suggest that the slowdown in China is less severe than feared after the very poor industrial production data for August. The average level for the HSBC/Markit manufacturing PMI in Q3 improved to 50.8 from 49.4 in Q2 and hence (unlike industrial production) still suggests an acceleration in growth in Q3. The current level of the HSBC/Markit manufacturing slightly above 50 would usually suggest underlying growth in industrial production around 9% y/y (6.9% y/y in August) and GDP growth around 7.5%.

Credit growth and investment demand and in particular the property market have been weak in recent months. However, recent data has also suggested that retail sales have been resilient and exports improving. Today’s data suggests that so far resilient private consumption and improving exports are offsetting a large part the negative impact from slower investment demand. Hence, today’s manufacturing PMIs suggest that China at least for now is able to rebalance the economy away from investment driven growth without a severe slowdown in growth.

In our view we are still in a phase with moderation in growth driven by weaker credit growth and investment demand. Hence, we still expect the manufacturing PMIs to move lower in the coming months. However, if the official manufacturing PMIs released next week also prove to be resilient in September, any substantial stimulus in China is off the table for now. In our view the manufacturing PMI will have to decline to around 48 before there will be any substantial stimulus in China.

Regarding the CNY the fundamentals still look quite strong despite some moderation in growth. Today’s manufacturing PMI confirms that China’s exports are performing quite well. In addition import growth has been subdued, aided also by a plunge in many import prices, and consequently China’s trade surplus has been surging in recent months. As long as growth does not slow severely, the PBoC will probably allow CNY to appreciate moderately to avoid substantial intervention in the FX market.