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HSBC Flash PMI: Better, but not Enough

04-23 16:07 Caijing
With growth still slowing and risks tilted to the downside, Beijing will likely ease further on both the monetary and fiscal fronts

April’s flash PMI showed modest improvement in manufacturing sector activity, suggesting that earlier easing measures are starting to work. While this should help alleviate concerns of a sharp growth slowdown, the pace of output and demand growth both remains low and the job market under pressure. All this calls for additional easing measures in the coming months. With inflation still on the cool, we expect the introduction of monetary and fiscal easing measures to speed up in 2Q.

China’s HSBC flash manufacturing PMI rose to a two month high of 49.1 in April, 0.8pts higher than the final reading in March. This modest improvement was led mainly by production. The output sub-index climbed to a two month high as well, to 49.1 in April from 47.3 in March, thanks to a slower contraction of new orders growth – which rose to a three month high of 48.9 from 47.4 in March. In particular, new exports orders increased to a three-month-high of 49.8 from 47.7 in March.  

There was however no meaningful improvement to China’s employment and underlying growth outlook. The employment sub-index edged up only marginally to 48.7 in April from 48.5 in March. Finished goods inventory, meanwhile, continued to accumulate, with the sub-index bouncing back up to 50.1 from 48.2 in March. As a result the new orders minus inventory ratio dropped to -1.2 in April from -0.8 in March. Quantity of purchases fell in April for the sixth consecutive month, albeit at a slower rate (49.7). Stocks of purchases saw a sharper pace of decline (48.6).

On the prices front, April’s input price sub-index fell to 50.6 in April from 51.2 in March as the output prices sub-index rose to 49.2 from 48.8 in March. Output prices have contracted (or stayed below 50) for six successive months.

The modest improvement in April’s flash PMI results plus March’s better than expected new lending and IP growth numbers suggests that Beijing’s earlier easing measures are starting to work. This, in turn, should help ease concerns of a sharp growth slowdown for China. In additional to the most recent reserve requirement ratio cut delivered at the end of February, the PBoC has also since suspended bill issuance in open market operations and lowered the reserve ratio for some rural financial institutions. Fiscal spending is also picking up, with its growth rate accelerating to 33.6% y-o-y in 1Q from 11.5% in 4Q last year.

Today’s result helps shore up our view that Beijing’s recent easing measures are finally starting to gradually filter through. At the same time, robust US economic data earlier this year is lending some support to exports orders.

That said, the pace of both output and demand growth remains low (vs. the long term average 52.9 and 53.4, respectively). The moderation of input prices implies that overall demand has yet to pick up meaningfully. With production growth still on track for a slowdown, China’s job market remains under pressure. Coupled with the downside risks still posed by a property-led investment slowdown and cooling exports, chances of further easing measures to come remain high.

The easing inflation outlook meanwhile should allow for further easing actions. Higher frequency data suggest that vegetable prices – the main culprit of a temporary rebound in March’s headline CPI - have started to fall sequentially on the back of warmer weather (which enables faster production). As such, April’s CPI is likely to decelerate again.

We expect both monetary and fiscal easing to speed up in 2Q and other 100bp RRR cuts this quarter, with the next one to be delivered in the coming weeks.

Bottom line: Beijing’s earlier easing measures are starting to work, helping to ease concerns of a sharp growth slowdown. That said, with growth still slowing and risks tilted to the downside, Beijing will likely ease further on both the monetary and fiscal fronts, especially with an accommodative inflation outlook.  

Chart1: HSBC manufacturing PMI: Flash vs. Final

Chart2. Production growth slowing down; job market under pressure

SUN Junwei - China Economist
QU Hongbin -Co-head of Asian Economics Research


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