China’s official PMI shows stabilisation, but is it too good to be true?

HONG KONG - The official manufacturing PMI read 50.1 in May, the same from the previous month. At first glance, it seems the manufacturing sector in China has stabilized. However, the message from the sub-indices is contradictory, says the French investment bank, Nataxis.

“Purchasing quantity was higher, but new order and new export orders were lower. Our question is: “What are these purchases of input for if orders are slowing?” More, employment in both manufacturing and non-manufacturing were below 50; that may mean more unemployment for the overall economy.

“Even though the official manufacturing PMI was still in expansion, we are sceptical that expanding purchasing of inputs can keep zombie companies afloat when the Caixin manufacturing PMI showed a contraction of the sector.

“Nevertheless, the services sector is still expanding, though at a slower speed. Our view is that the overall economy continues to grow slower, which is hurting the labour market.”

ANZ Bank says the official PMI figure suggests that China managed to sustain growth momentum on the back of property investment and fiscal support. “If June’s PMI manages to stay expansionary, Q2 GDP will likely fall within the range of 6.6-6.8%,” ANZ says.

“Today’s figure rules out the possibility of imminent broad-based monetary policy easing. We maintain our view that China’s top political leaders did not welcome property-led growth in Q1.
“The strong rebound of the PMI in March of 1.2% and the improving inflation outlook prompted us to forecast moderately accommodative monetary policy, neither tightening nor aggressive. Likewise, we believe if the economy deteriorates sharply, the PBoC will reconsider broad-based easing measures, such as a reserve requirement ratio cut.
“Presently, supply-side structural reform and deleveraging continue to dominate the policy agenda. The central bank will likely focus on managing market liquidity and adopt a targeted approach.”  www.live.anz.com www.natixis.com (ATI).