Tuesday, July 24, 2012

Three research groups' views of China's manufacturing PMI

China's manufacturing PMI (flash) unexpectedly increased in July. Production and new orders showed improvement. Is it possible that China's slowdown has ended and manufacturing growth is beginning to re-accelerate? Here are views from three research groups that focus heavily on China:

1. Goldman is quite bullish, pointing out that this will translate into a strong industrial production number.
GS: - We see this as a very strong reading. Unlike the official PMI, the HSBC/Markit PMI does not have obvious seasonality problems. The index still rose by 1.3 ppt after making a standard x12 seasonal adjustment. This magnitude of rise in one month is significant.

Contrary to popular interpretation, the fact that the level of the index was below the 50% threshold does NOT mean manufacturing activities were experiencing negative growth/contraction. Conceptually, a sub-50% reading means “there was a larger number of respondents who said their production was down from the month before than those who replied production was up”. This is not necessarily the same as “the level of production of all the companies surveyed fell”. While the relationship is not totally stable, historically, when the HSBC/Markit PMI is at the 50% levels, yoy and mom industrial production (IP) growth tends to be in the low 10% levels, which is a very long way off from a contraction (interestingly, the PMI is more closely correlated with yoy IP despite the fact the survey asks companies about changes compared with the previous month, which should correspond with mom IP). When sequential IP falls to sub-zero levels, the PMI would be at around 45%.
Source: HSBC

2. HSBC views this as a stimulus driven improvement, pointing to continued weak demand and employment. But they believe that low inflation will allow China to push through more easing and materially improve growth.
HSBC: - “July's headline PMI picked up modestly to a five-month high of 49.5, suggesting that the earlier easing measures are starting to work. That said, the below-50 July reading implied demand still remaining weak and employment under increasing pressure. This calls for more easing efforts to support growth and jobs. We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through.”
3. The ISI Group is not ready to say that the slowdown is over. They also attribute this PMI jump to China's recent easing measures and expect more stimulus to come because of weak demand and employment. But they don't anticipate a material improvement in growth.
ISI Group: - Finally an uptick but we are not ready to call this the turn...According to HSBC, July’s Flash PMI picked up modestly to hit a five-month high of 49.5, suggesting that the earlier easing measures are starting to work. However, the below-50 reading implies weak demand and employment pressures. More easing is necessary. This still soft PMI reading is consistent with our below-consensus GDP forecast. It is not consistent with a hard-landing. We expect the PMI to move roughly sideways in 2012. China’s economy is still growing, but no return to the sustained 9-10% growth rates of the past.

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