China: PMIs Suggest Stabilisation

• The  National Bureau of Statistics (NBS) manufacturing PMI in December improved slightly from 49.0 to 50.3 suggesting that while growth remains subdued in Q4 the Chinese economy does not appear to be deteriorating further. Other manufacturing PMIs released across Asia also showed signs of stabilisation.

• With no signs of a sharp deterioration in the economy, we also expect the policy response to be cautious in the coming months. We expect the reserve requirement to be cut by at least 150bp in H1 12 but the leading interest rate to stay unchanged.

Details

The manufacturing PMI compiled by China’s NBS in December improved to 50.3 (consensus 49.1, Danske Bank 49.0) from 49.0 in November. In addition, the final estimate for the HSBC manufacturing PMI in December was revised slightly lower to 48.7 from 49.0 in the flash estimate but still showed a slight improvement from 47.7 the previous month.

Looking at the details both new orders and export orders improved in December but in both cases remained slightly below 50. The current output component improved markedly from 50.9 to 53.4. The inventory component declined in December and the new order inventory balance improved for the first time since July in the NBS manufacturing PMI. However, in the HSBC manufacturing PMI the new order inventory balance continued to deteriorate in December.

Other Asian countries have released manufacturing PMIs today (see chart overleaf). In India, the manufacturing PMI improved from 51.0 to 54.2, while in Taiwan it improved from 43.9 to 47.1 and in South Korea it declined slightly from 47.1 to 46.4. In Japan the manufacturing PMI (released last week) improved slightly from 49.1 to 50.1 in December. Hence, on balance there are signs of stabilisation across Asia.

Assessment and outlook
The manufacturing PMIs in China suggest that growth remained subdued in Q4 but at this stage there are no signs of a sharp deterioration in the Chinese economy. Rather the message appears to be status quo in Q4 compared with the previous two quarters, with GDP growth remianing slightly below 7% q/q AR in Q4. We expect GDP growth to pick up slightly in Q1 12, to around 8% q/q AR. If our forecast proves right, China’s manufacturing PMIs should improve to the 52-53 range by the end of Q1 12. That said, so far there are no clear signs in the manufacturing PMIs that GDP growth is poised to improve in the coming quarters.

With no signs so far that growth in China is deteriorating sharply, we also expect the policy response to be relatively cautious and depend on how data develops in the coming months. In particular, in our view it could prove important that inflation in December is likely to have increased above 4.5% y/y from 4.2% y/y on the back of higher food prices (consensus is currently that inflation will be unchanged at 4.2% y/y). However, we believe this increase in inflation should prove temporary and we still expect the reserve requirement to be cut by at least 150bp in H1 12. At this stage, we do not expect the leading benchmark interest rates to be cut.