China: A tale of two PMIs - Natixis

Alicia Garcia Herrero, Chief Economist at Natixis, explains that there is a myth in the market as when the official and Caixin PMI diverge, the market generally believes the official PMI explains the outlook of large and state owned corporates, while the Caixin PMI covers the smaller private firms. But whether this perception fits reality should be questioned, she further adds.

Key Quotes

“Our analysis shows the general market interpretation on PMI may not reflect the true picture. Caixin PMI is more in line with large corporates in the official index and the correlation has only increased over years, at least under the official definition of corporate size. The divergence has meaning for different purposes. The official PMI is more useful in predicting growth while the Caixin PMI is more trade oriented, but there is nothing to deal with corporate size.”

“We believe the correct interpretation of the recent PMI data is that the momentum of the aggregate Chinese economy will decelerate, but external condition will cushion part of the impact. Besides, large corporates tend to have a more positive outlook than SMEs as they are more dominant in upstream industries. The increase in raw material prices and government stimulus have been very supportive. This also means SMEs will face a harder time from higher raw material price as the final product price does not pick up at the same speed.”