China PMI: ANZ's Take

  1. 47 Posts.
    CHINA’S soft PMI calls for policy recalibration
    • China’s official manufacturing PMI, the bellwether of large industrial firms, remained unchanged at 50.2 in June. In the meantime, HSBC China flash PMI, representing a group of private-sector and small and medium enterprises, edged up to 49.6 in June, from 49.2 in the prior month.
    • Breaking into the sub-indices, the output index remained unchanged at 52.9, suggesting that industrial production could have stayed sluggish in June. New order index and export order index dropped by 0.5pt and 0.7pt, to 50.1 and 48.2 respectively. In addition, the input price index dropped sharply by 2.1pts to 47.3, led by soft steel and petrochemicals prices.
    • Real activity indicators remained sluggish in April and May, and the electricity generation dropped again in early June, pointing to a soft print of the Q2 GDP growth. We thus see that China’s economy could have missed 7.0% growth in Q2.
    • In general, the softness in the manufacturing sector remains, requiring more policy recalibration. China’s central bank cut the policy rates by 25bps over the past weekend, and conducted targeted reserve requirement ratio (RRR) cut towards the commercial banks that meet certain level of loans to the agricultural sector and SMEs. After the rate cut, the one-year lending rate has been lowered to 4.85%, the lowest level in the past two decades, clearly signalling that monetary policy stance has become more accommodative. In addition, we see that the fiscal policy should take the driving seat to help restore the market confidence over the economic outlook.
    • Looking ahead, as real interest rates faced by Chinese corporates remain elevated, we see that further monetary easing is still highly needed. We forecast that the PBoC will further lower interest rates by 25bps in Q3, and cut reserve requirement ratio (RRR) by additional 100bps in the second half of this year, with each 50bps cut in Q3 and Q4 respectively.
 
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