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HSBC China Manufacturing PMI (Final, July):Taking Its Time

08-01 13:36 Caijing
China's slowdown has stablised but a meaningful turnaround is not yet in sight.

The final manufacturing PMI confirms only modest improvement of manufacturing conditions thanks to the initial effect of the earlier easing measures. The reversal of China's growth slowdown is taking its time to unfold. Downside pressures persist with external markets still deteriorating and labour market conditions slackening. We still expect Beijing to step up policy easing in the coming months to support growth and employment.

HSBC's China manufacturing PMI headline reading rebounded to a three-month high of 49.3 (a notch lower than 49.5 in flash) in July from 48.2 in June, extending the current period of below-50 readings into the ninth consecutive month.

One bright spot in this months' HSBC PMI reading was the rise in output thanks to a more modest contraction of new business inflows. July's output subindex rose to a five-month high of 50.9 (vs. 49.3 in June), and the first reading above the break-even level in five months. The new orders sub-index increased to a three-month high of 48.7 in July from 47.2 in June, but contracted for the ninth straight month. The new export orders reading was relatively weaker than total new orders, at 46.7 in July compared with 45.7 in June.

Without a meaningful gain in new business, July's finished goods inventory continued to build for the third month in a row (at 50.6 in July vs. 51.7 in June). This kept the new orders minus finished goods inventory ratio firmly in contraction at -2 in July (vs. -4.5% in June and -2.3 in 2Q). The quantity of purchases and stocks of purchases were both reduced at a marginal pace (at 49.3 and 49.8 respectively).

The lack of new business and destocking pressures continued to weigh on employment, whose sub-index worsened to 47.7 (vs. 48.8 in June), its lowest level since March 2009 and the fifth consecutive reading of below 50.

Prices contracted for the third month in a row, reflecting still weak demand. Input prices sub-index remained largely unchanged at 41.9 in July, compared to 41.5 in June, while output prices remained subdued at 41.3 in July compared with 40.5 in June.

Separately, the official manufacturing PMI moderated to an eight-month low of 50.1 in July, below market expectation of 50.5 and 50.2 in June. Details suggest a faster contraction of new exports orders (46.6 in July vs. 47.5 in June) and still lackluster domestic demand, given the continuous sharp fall of input prices (41 in July vs. 41.2 in June), the weaker reading of imports (45 in July, the lowest reading since 2009) and the second consecutive contraction in employment.

The final reading of July's HSBC China manufacturing PMI, plus the release of official manufacturing PMI, suggests that China's economy slowed into 3Q, but at a moderating pace.
July's reading of HSBC China manufacturing PMI is similar to the average reading of 49.2 in 4Q 2011 and slightly better than the average of 48.6 and 48.9 respectively in 2Q and 1Q this year.

Having said that, China's growth slowdown has yet to be fully reversed and downside pressures persist for the foreseeable future.

Firstly, external markets continue to deteriorate. The new exports orders (46.7 in July) remained on track for further and sharper contraction (vs. 48.1 in 2Q and 48.5 in 1Q). The latest flash PMI for the Eurozone also suggests a deeper manufacturing recession to come with France and Germany's July flash PMIs contracting sharply. Meanwhile the United States is heading for slower growth in 3Q after the deceleration of GDP to 1.5% in 2Q from 2% in 1Q. All these signal a more challenging 3Q for Chinese exporters.

Secondly, Chna's job market is facing increasing pressures. Despite the official reports of stable urban registered unemployment ratio (unchanged at 4.1% since 3Q 2010, compared with the previous peak of 4.3% during the crisis time in 2009), the current slackness in labour market is evidenced by both the HSBC and official PMIs, pointing to the slower employment growth and easing wage growth for migrant workers. Anecdotal reports of workers being laid-off in some well-known manufacturing companies are also surfacing. As the labour market is a lagging indicator of economic cycles, a further deterioration of employment conditions remain possible.

Beijing policy makers are well aware of these risks and willing to react proactively. Premier Wen recently restated employment as a top priority. Growth and employment again topped the policy agenda for 2H. Some concrete supporting measures have already come through, in addition to the latest two interest rate cuts. These include the extension of VAT reform programme from Shanghai to ten other provinces/cities (starting from 1 August 2012), the increase of infrastructure-related investment (for example, the 2012 planned investment for railway infrastructure construction lifted to RMB470bn or an increase of RMB64bn), and the pledge of faster approval of projects with private investment participation.

The room for further easing remains ample, in particular as inflation is falling fast (to below 2% in July and remaining muted through the rest of this year). It is a matter of time that policy easing is fully filter through. Watch out for the new lending and investment numbers in July, to be released in the coming two weeks.

Bottom line: China's slowdown has stablised but a meaningful turnaround is not yet in sight. With downsider pressures persisting, Beijing should and will step up policy easing to hold up growth and employment.

Chart1. China
Chart1. China's growth slowdown has yet to be fully reversed

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


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