China: PMI will continue to drop but remain above 50 – ING

Iris Pang, Economist at ING, expects the China’s manufacturing PMI to fall from 50.8 last month to 50.3 in October.

Key Quotes

“The main reason for this is that the trade war will be hurting manufacturing activity as tariffs imposed by the US are too costly for Chinese exporters to fully absorb. But we still expect the reading to be above 50 because we think that stimulus measures  (e.g. export tax rebates) and salary and corporate tax cutting measures should support domestic consumption for the time being. Therefore manufacturing activity for the domestic market should continue to rise.”

“Services will continue to expand, but again more slowly

We expect the non-manufacturing PMI will also fall from 54.9 to 54.5 in October.”

“Domestic demand is now crucial to support the economy

With an escalating trade war between China and the US, the Chinese government is using both fiscal and monetary stimulus measures to support local demand.

We see domestic demand as a crucial factor to support the whole economy as it will avoid massive job losses and drive activity from export demand to local demand.”

“We keep our forecast of USDCNY at 7.0 by end 2018

Tariff news will continue to weaken the yuan, and USDCNY is heading towards 7.0. We believe that USDCNY will hit 7.0 a few times before crossing over, so it will not create any surprise to the market when it happens.”