Weaker Than Expected PMI Suggests Intensifying Slowdown

China's HSBC Flash Purchasing Managers' Index (PMI) plummeted to 48.3 in February, marking its lowest point since July 2013. The result missed market expectations of 49.5 by a considerable margin, and also represented a notable decline from January's 49.5 figure. Weakness was broad based across the index, with the employment, output prices, and input prices sub-indices all declining by a faster rate in February than January. Likewise, the disappointing data also flew in the face of recently released credit figures ( see 'Liquidity Surge Doesn't Change Tightening Outlook', February 17), further corroborating our view that economic activity is under increasing pressure despite a transitory spike in lending.

Employment Sub-Index Particularly Concerning

Poor manufacturing data will tighten the screws on Beijing's planned economic reforms, allowing less room to maneuver with its crackdown on the shadow banking sector, as well as with its planned liberalisation of interest rate policies. Despite the fact that such policies would, in our eyes, prove to be substantial positives in the long-run, they would most likely be growth negative at the outset, thereby undermining what we believe is already a shaky economic growth outlook. On this front, the most concerning data point emerging from February's flash PMI data is the contraction in the employment index, which clocked in at a stark 46.9, its lowest point since February 2009.

Deeper Into The Doldrums
China - HSBC Flash PMI

Weaker Than Expected PMI Suggests Intensifying Slowdown

China's HSBC Flash Purchasing Managers' Index (PMI) plummeted to 48.3 in February, marking its lowest point since July 2013. The result missed market expectations of 49.5 by a considerable margin, and also represented a notable decline from January's 49.5 figure. Weakness was broad based across the index, with the employment, output prices, and input prices sub-indices all declining by a faster rate in February than January. Likewise, the disappointing data also flew in the face of recently released credit figures ( see 'Liquidity Surge Doesn't Change Tightening Outlook', February 17), further corroborating our view that economic activity is under increasing pressure despite a transitory spike in lending.

Deeper Into The Doldrums
China - HSBC Flash PMI

Employment Sub-Index Particularly Concerning

Poor manufacturing data will tighten the screws on Beijing's planned economic reforms, allowing less room to maneuver with its crackdown on the shadow banking sector, as well as with its planned liberalisation of interest rate policies. Despite the fact that such policies would, in our eyes, prove to be substantial positives in the long-run, they would most likely be growth negative at the outset, thereby undermining what we believe is already a shaky economic growth outlook. On this front, the most concerning data point emerging from February's flash PMI data is the contraction in the employment index, which clocked in at a stark 46.9, its lowest point since February 2009.

While the government is extremely intent on meeting its headline GDP target of 7.5%, the labour market remains its single largest concern, and any marked deterioration in unemployment is likely to both delay harder-hitting economic reforms and spur Beijing into stimulatory action. As suggested by our below consensus full-year GDP forecast of 7.1%, we continue to hold this scenario as our core view, and therefore believe that the government will encounter an increasingly difficult environment in which to implement the sweeping economic reforms introduced at its Third Plenary Session in November 2013.

A Telling Break?
China - Exchange Rate, CNY/US$

Yuan Weakness Another Warning Sign

Along with the weaker than expected PMI data, the Chinese yuan has begun to show incipient signs of weakness since the beginning of February. Although spot moves in the currency have, in typical form, been muted (the current sell-off amounts to a mere 0.7% retreat from its January peak), the price-action has nevertheless broken through long-term support, signaling potential for further weakness over the coming weeks. This dynamic once again clashes with strong January trade data, and could indicate a weaker demand outlook for not only the currency but also Chinese goods going forward.

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