China’s latest PMIs point to 6.5% growth in 2017: BBVA

HONG KONG - China’s official manufacturing PMI (released last Friday) picked up significantly to 51.7 in June from 51.2 in May, well above market expectations (consensus: 51), and following the same trend, the Caixin China Manufacturing PMI announced today, which includes a survey sample tilting toward SMEs and exporters, increased to 50.4 in June from 49.6 the previous month (Ccnsensus: 49.8).

BBVA says the soaring PMI outturns were mainly driven by surging external demand and the easing of credit condition in June.

“Now, it is increasingly likely that the authorities will meet their full-year growth target of 6.5%,” BBVA says. “Nevertheless, the economy is still subject to a number of uncertainties, externally and domestically.

“Moreover, the stronger-than-expected momentum could embolden the authorities to push forward with greater efforts in its deleveraging campaigns in both financial sector and over-capacity industries.

“That being said, the authorities will continue their prudent stance of monetary policy, and deploy more measures to crack down on rampant shadow banking activities and debt overhang.

“We therefore believe that China’s secular slowdown will continue over the next couple of years if the pace of structural reforms in certain key areas remains anaemic.

“On the demand side, the new order index significantly increased to 53.1 from 52.3 previously, as manufacturing industry expanded and internal demand gain momentum.

“The new export order index and import index also picked up (52 and 51.2 respectively), indicating external demand helps to sustain growth.

“On the supply side, the production index increased to 54.4 from last month’s reading of 53.4, while the finished goods inventory index declined, indicating manufacturing production continued to expand; in addition, the business activity expectation index surged to 58.7 from 56.8, suggesting a positive market sentiment.

“The upbeat PMIs reflected the better-than-expectation momentum of China’s economy. To a certain degree, it could reinforce the Government’s confidence of pursuing stricter regulations to correct the existing financial vulnerabilities, such as debt overhang, shadow banking and housing bubbles, which grew rapidly with the previous implementation of distortionary growth-stimulating policy initiatives.

“The deleveraging measures, both in the financial and real sector, will consequentially drag the growth over the medium term.”  www.bbva.com (ATI).