- China’s HSBC manufacturing PMI in May declined from 49.3 to 48.7 suggesting that growth remains stuck below trend with so far few signs that growth is picking up substantially. On a positive note, the HSBC PMI does not suggest that growth is slowing sharply compared with the previous two quarters as indicated by the very weak hard data for April. Weak export orders suggest downside risk for China’s exports.
- We now expect fiscal and monetary policy to be eased more aggressively in the coming months. We are cutting our GDP growth forecast for Q2 from 8.9% q/q AR to below 8% q/q AR but we still expect growth to improve to above 9% q/q AR in H2 on the back of a more forceful policy response.
Details
China’s flash HSBC manufacturing PMI in May declined to 48.7 from 49.3 in April. It was a bigger decline than we expected, albeit recent data have indicated increasing downside risk. The current output improved from 49.3 to 50.5 (the highest level in seven months), while the forward-looking components were weak with new orders declining from 49.7 to 48.4 and export orders declining markedly from 50.2 to 47.8. Hence, it appears that the intensifying weakness in May has to a large degree been driven by weaker exports.
The overall message in today’s manufacturing PMI is that GDP growth remains stuck below trend in the 7%-8% q/q AR range as in the previous quarters (see chart) The average level for the output component was 49.0 in Q4 11 and 48.4 in Q1 12 (May: 50.5) and for new orders the average level was 48.2 in Q4 11 and 48.3 in Q1 12 (May: 48.4). Hence the PMIs have broadly moved sideways since Q3 11. 
On the other hand, there are no signs that growth in China is decelerating markedly and we are far from a hard landing scenario. We maintain our view that the substantial weakness evident in the hard data for April was largely due to calendar distortions due to fewer working days in April. The output component in the HSBC manufacturing PMI - that usually has the highest correlation with current industrial production - has been resilient in recent months (see chart on next page). Hence, despite the soft PMI today we expect to see a rebound in data like industrial production, foreign trade and retail sales in May.
Assessment & Outlook
The deterioration in the new order inventory balance suggest that we could see further weakness in the manufacturing PMIs in the coming months and the relatively sharp drop in export orders suggest that there is increasing downside risk from international developments and exports. China’s NBS manufacturing PMI is poised to decline more substantially in the coming months from its current level above 53 partly because seasonality will subtract more than 2-points alone in May and June.
We now expect fiscal and monetary policy to be eased more aggressively than we previously expected. The Chinese government today announced it will step up infrastructure investment. We now expect the reserve requirement to be cut by 200bp before the end of 2012 with the next cut likely in June. We do not expect the leading interest rate to be cut, although the likelihood of a cut is increasing. With so far few signs that growth is picking up we revise our GDP forecast for Q2 down to 7%-8% q/q AR from previously 8.9% q/q AR. We still expect GDP growth to improve to above trend in H2 12 on the back of a stronger policy response, but the growth forecast for 2012 will have to be revised slightly lower from 8.6% to probably 8.4%.
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