China: HSBC PMI Unchanged, but Improvement in Details

The flash estimate for China’s HSBC manufacturing PMI in January only improved marginally from 48.7 to 48.8. However, the details were stronger with new orders and export orders improving markedly and inventory and current output declining. This suggests that the weakness is increasingly driven by a inventory adjustment, while there are signs of improvement in final demand.

While Friday’s PMI still suggests subdued growth in early 2011, there are signs of stabilisation. While growth will remain relatively subdued in Q1 12, leading indicators like new orders, the new-order-inventory balance and accelerating M2 money supply growth suggest growth is poised to improve in the coming quarters. We expect cautious monetary easing with a cut in the reserve requirement probably just around the corner.

Details
The flash estimate for China’s HSBC manufacturing PMI in January only improved marginally from 48.7 to 48.8 (Danske Bank: 49.5). However, the details were stronger and show signs of stabilisation. New orders improved markedly from 46.9 to 49.5, while the inventory component declined from 51.3 to 48.4. Hence, the new order-inventory-balance improved markedly in January (see chart). The current output component on the other hand declined from 49.5 to 47.0. This suggests that weakness in January has to a large degree been driven by inventory cuts, while there are tentative signs of improvement in final demand.

Export orders in January improved from 49.7 to 51.1 underscoring that exports during the current slowdown in China have performed much stronger than in the wake of the financial collapse in 2008 when exports contracted and export orders in the HSBC manufacturing PMI bottomed out below 30 (see chart on next page). However, purchase of inputs – which usually is a good indicator for China’s imports - declined from 49.2 to 46.4 in January. This is consistent with inventory cuts and also suggests that we might see some weakness in China’s imports in the coming months despite some improvement in growth.

The output price component increased slightly for the second month in a row from 43.8 to 44.0 suggesting that inflationary pressure has eased substantially. A comparison with 2008, when the output component bottomed out around 32, also suggests that the current slowdown in China is substantially less severe than in 2008.

Assessment and Outlook
Friday’s data suggest that growth in China remains relatively subdued in early 2012 driven increasingly by an inventory correction, while there are signs of improvement in final demand. There are no signs of a hard landing in Friday’s manufacturing PMI and it also supports our view that the current downturn is substantially softer than the one China experienced in 2008 not least because exports remain relatively resilient. That said, we might see some weakness in China’s imports of particularly commodities due to the current inventory cuts.

Growth is expected to remain relatively subdued in Q1 12, but we maintain our view that China’s GDP growth will improve in the coming quarters. This view is currently supported by leading indicators like new orders in Friday’s manufacturing PMI, the new order-inventory balance and recent acceleration in M2 money supply growth. Policy-wise the recent data releases in China leave room for some monetary and fiscal easing, but they do not suggest it should be aggressive. We believe a cut in the reserve requirement is imminent.