PMI Uptick No Real Cause For Cheer
China's flash HSBC purchasing managers' index (PMI) recorded a significant bounce in August, rising to 50.1 from 47.7 in July. This was a big beat relative to consensus expectations of 48.2, and signals that recent minor policy easing moves may be having a positive impact. The August print, however, is no cause for cheer. The economy appears to be at stall speed, and recent declines in money supply growth are yet to take have an effect, which is a worrying sign. Also of concern is the deterioration in exports seen in the details of the report, with new export orders declining at a faster pace, which comes despite the improvement in economic activity in the developed world of late. This could be a signal that the yuan's real effective appreciation is beginning to take its toll on export competitiveness, and supports our view of currency weakness.
For now, we have seen some stabilisation in China's banking system, with interbank lending rates falling back to more normal levels. While credit crunches continue to be felt in various localities across the country, from a national perspective we appear to be past the worse for now. However, we contend that the flare-up in risk aversion within the banking system in June was a symptom of the credit boom that preceded it, and we believe that the ongoing decline in credit growth will result in further instability over the coming months and quarters, acting as a major headwind to a sustainable recovery. Indeed, we still expect China's overall macroeconomic picture to get worse before it gets better. We reiterate that we expect the growth picture in China to continue to deteriorate over the coming years, and are forecasting real GDP growth of 7.5% in 2013 and 6.7% in 2014.
|Struggling To Rise Above 50|
|China - Purchasing Managers' Index|