China: Conflicting Messages From Manufacturing PMIs‏

The NBS manufacturing PMI improved slightly in May, painting a more resilient picture of the Chinese economy than the HSBC manufacturing PMI which showed a marked decline in May in its final reading. The two manufacturing PMIs are sending very conflicting messages. The NBS PMI suggests the Chinese economy is moving sideways with growth slightly below trend, while the HSBC PMI suggests continued deceleration.

The development in the NBS manufacturing PMI is most consistent with the development in leading indicators, which have so far not marked renewed deceleration in the Chinese economy. We expect GDP growth to remain around 8% q/q AR in the coming quarters, with a slight improvement in H2 13. GDP growth needs to ease below 7.5% before Chinese policymakers will consider additional easing.

Details
China’s official manufacturing PMI released by the National Bureau of Statistics (NBS) improved slightly in May to 50.8 (consensus: 50.0, DBM: 50.0) from 50.6 in April. Total new orders improved marginally to 51.8 from 51.7 while export orders improved to 49.4 from 48.6 but remain slightly below the critical 50 mark. Inventories were still cut in May, but the pace of inventory cuts eased slightly compared with April. Overall the new order inventory balance remains relatively healthy in the NBS manufacturing PMI, so there are no signs of near-term weakness in the NBS manufacturing PMI.

The HSBC manufacturing PMI in its final reading declined to 49.2 (revised down from 49.6) in May from 50.4 in April. Contrary to the NBS survey, it showed a marked decline in new orders to 48.7 from 51.2. However, in line with the NBS survey, there are signs of stabilization in exports with export orders improving slightly to 48.9 from 48.4. The HSBC manufacturing PMI shows increasing inventories and much weaker new order inventory balance than the NBS manufacturing PMI. For that reason the HSBC manufacturing PMI also suggests continued weakness in the near term.
Hence, we have conflicting messages from the two manufacturing PMIs.

In general, the sample used in the HSBC manufacturing PMI is believed to be skewed towards smaller private companies that are also believed to be more export-dependent companies. On the other hand, larger state-owned companies are believed to be better represented in the NBS survey, which has also expanded its sample to around 3,000 companies. In comparison, the size of the sample used in the HSBC survey is fewer than 900 companies. Seasonal distortions have previously been a problem in the NBS manufacturing PMI, but NBS has made changes recently, and seasonal distortions now appear to be less of an issue in the NBS manufacturing PMI.

In general, the development in the NBS manufacturing has been most consistent with the development in leading indicators of late. For example, the OECD’s leading indicators have in recent months suggested that the recovery has lost momentum, but have so far not suggested that the Chinese economy has entered a renewed severe deceleration in growth.

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