China: HSBC PMI Suggests Slowdown Intensifying‏

The flash estimate for the HSBC manufacturing PMI in June dropped to 48.3 from a final reading of 49.2 in May. The details remained weak with new orders declining to 47.1 from 48.7 and export orders in June plunging to 44.0 from 48.9 in May. Finished goods continued to increase in June and hence the New order-inventory-balance remains relatively unhealthy indicating continued weakness in the coming months.

Today's HSBC manufacturing PMI suggest that the deceleration in China's growth is intensifying. In June the weakness appears to have been driven mainly by weakness in export orders suggesting that the global manufacturing is currently losing considerable steam.

For the current quarter it now appears that GDP growth in Q2 13 could ease to 7.6% y/y from 7.7% y/y in Q1 13. The moderate recovery we have in our current forecast in H2 2013 also is starting to look increasingly doubtful. Not just does exports appear to be slowing more than expected. In our view there also increasing risk that domestic investment demand in China could slow in the second half of this year, as the current tight liquidity conditions in the money market indicates the regulatory tightening targeting local government lending and banks issuance of wealth management products could work indirectly as a substantial monetary tightening.

So far the weakness does not be severe enough to force additional monetary and fiscal easing from the Chinese government. Focus is on structural economic reforms and managing financial risks and additional stimulus is regarded as counterproductive at the current juncture. That said there is increasing risk that GDP growth in H2 13 could drop below the government 7.5% target and hence force the government to turn its focus back to stabilizing the economy from structural economic reforms

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