China: Signs of stabilisation in HSBC manufacturing PMI

The flash estimate for the HSBC/Markit manufacturing PMI in January improved slightly to 49.8 (consensus: 49.5, DBM: 49.6) from a final reading of 49.6 in November. This is the first improvement in the HSBC/Markit manufacturing since October.

The details were relatively strong with new orders improving to 50.8 from 49.7 but export orders declining slightly to 51.1 from 51.5. Hence, it does appear that the slight improvement in January has primarily been driven by domestic demand. The finished goods inventory component was unchanged at 49.9 and hence the new order inventory- balance improved slightly in January. Stocks of purchases were cut at a faster pace in January with the stocks of purchases component declining to 47.4 from 48.4.

The deflationary pressure from primarily lower energy and commodity prices also appears to have intensified in January. The output price component declined to 43.9 from 44.9, while the input price component again dropped markedly to 39.9 from 43.1, the lowest level since March 2009. Because of the large decline in input prices, manufacturing margins appear to be holding up relatively well.

The signs of stabilisation evident in the manufacturing PMI in January are consistent with the hard data released for December, see China: GDP growth unchanged at7.3%, 20 January 2015. Credit growth and investment demand stabilised and growth in industrial production accelerated slightly in December. The relatively strong details in January’s HSBC/Markit manufacturing PMI suggest continued moderate improvement in the coming months and are consistent with our view of a modest recovery in H1 15.

Policy-wise recent data have taken away the pressure on Peoples Bank of China (PBoC) for imminent easing. We still expect PBoC to cut the reserve requirement twice by 50bp in 2015. That said, PBoC continues to act very cautiously in the interbank market, suggesting some unwillingness to cut the reserve requirement and boost liquidity in the interbank market substantially. China in our view remains in a managed debt leveraging situation with government focus on containing credit growth and managing financial risk. Hence, we are unlikely to see a substantial recovery in growth in H1 15.