The official Chinese PMI manufacturing fell sharply in February from 51.3 to 50.3 (Consensus 51.1). While there could be some distortion due to Chinese New Year, the decline is nevertheless so big that it is still likely to be more than just noise. However, while we expect the Chinese economy to slow this year, the fall probably exaggerates the actual development. We like to use metal prices as a real-time indicator of activity in China and these have not warned of a sharp slowdown (see Chart 1). With China consuming 50% of global metals, a sharp change in the trend should have shown up in commodity demand and thus prices.
The fall was driven by a sharp decline for small and medium-sized enterprises (SMEs) , while the large enterprise index held up. This could be a sign that the financial tightening is starting to have an effect on SMEs, as these depend more on credit from smaller banks, which have been hurt the most by the crackdown on shadow finance. However, the crackdown has been going on for more than a year and should not suddenly show up from one month to the next.
The export order index has shown a big decline in recent months (see Chart 3) , which may explain the weakness in the small and medium-sized companies but, again, while the US and euro area may have slowed a bit, this should not warrant a big and sudden decline in Chinese exports. Hence, overall our best guess is that we will see some recovery in the index in March.
To conclude, the decline in PMI underpins the expectation that the Chinese economy is set to slow this year but it points to a faster slowdown than we expect. This is just one number and we need to see more confirmation of this to draw firm conclusions. Our baseline is that we will see a gradually declining trend in PMI this year (see Chart 4), which should warrant a rebound in the official PMI in March. Tomorrow we are due to get the private version of PMI from Caixin, which is now even more interesting.
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