China: PMIs surprise on the upside
Following months of rapid deceleration, the Chinese Purchasing Manger Indices (PMIs) for September beat expectations. The readings have generally improved, on both the domestic and the external fronts. and for both large and small and medium-sized enterprises (SMEs).
The PMI for large enterprises rose slightly and remains in expansionary territory. While the PMI for SMEs continued to contract in September, it improved moderately from August.
Sub-indices of the official PMI also show a broad-based improvement. The new-orders sub-index rose to 50.5, the first time since April this gauge was above 50 (the dividing line between expansion and contraction).
The external sector indicators are also suggesting some improvement. The new export orders sub-index improved significantly in September and was well up from the recent low of 46.3 in June (although the figure remained below 50). The imports sub-index improved somewhat as well, although to a lesser extent than for export orders.
Whether the rebound in PMIs will be supported by hard data remains to be seen, given numerous headwinds on the horizon. Indeed, the impact of the latest round of US tariffs on Chinese exports is yet to show through in hard data. Moreover, the growth in property investment will likely gradually decline, given the government’s hawkish stance on the sector. Last but not least, the softness in household consumption may persist given declining income growth.
Nonetheless, the better-than-expected PMI results reduce our concerns about further sharp deterioration in China’s growth momentum. We maintain our view that a modest recovery could emerge toward the end of the year, following the Q3 weakness.
Given policy easing and the probability of additional fiscal stimulus, we believe a moderate recovery in growth is possible toward the end of the year. However, the strength of such a recovery could be quite modest given the various headwinds and, more importantly, the structural downward trend in Chinese growth. As things stand now, the risks to our current Chinese GDP forecast for 2019 of 6.3% are still to the downside.
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