1 July 2016
PMI Quarterly on China Manufacturing Jul 2016
PMI shows signs of stabilization in the manufacturing sector and the economy
After having stayed in the contractionary zone for seven consecutive months, China’s manufacturing PMI rose above the critical 50-mark in March. The PMI then stood at 50.1 in April and May, before edging down to 50.0 in June. The index readings in recent months show signs of stabilization in the manufacturing sector and the economy. That being said, the manufacturing sector and the economy are still not on solid footing, in our view. (See exhibit 1)
It is noteworthy to recognize the discrepancy by size of enterprises. The PMI of ‘large enterprises’ fell from 51.0 in April to 50.3 in May, before rebounding to 51.0 in June. The index stayed above the critical 50-mark in the past three months, indicating the continuous expansion of ‘large enterprises’. Meanwhile, after having risen for four consecutive months, the PMI of ‘medium enterprises’ dropped to a three-month low of 49.1 in June, suggesting that the recovery of ‘medium enterprises’ is not stable. The PMI of ‘small enterprises’ rose from 46.9 in April to 48.6 in May, before dropping to 47.4 in June. The index stayed in the contractionary zone in the past three months, indicating the difficult situations facing ‘small enterprises’. (See exhibit 2)
The PMI stayed between 50.0 and 50.1 throughout April to June, suggesting that the economy has been stabilizing. This could be attributed to the relatively strong growth of infrastructure investment and retail sales in recent months. Several sub-indices show positive signs for the economy. For example, the output index rose to a twelve-month high of 52.5 in June. Besides, the new orders index has stayed in the expansionary zone for four consecutive months from March to June. Nevertheless, the index has been on a downward trend in recent months, indicating the moderation in demand growth. Meanwhile, the purchases of inputs index fell from 51.2 in May to 50.5 in June, the lowest level in four months, indicating that the growth of purchasing activities has decelerated recently. This may also suggest that the business confidence has waned lately.
To keep stable economic growth, the Chinese government is likely to further boost the domestic demand in coming future. On the monetary front, the central bank will ensure abundant liquidity. On the fiscal front, the government will increase fiscal expenditure as well as infrastructure investment. All these efforts are set to maintain a stable macroeconomic environment that favours the implementation of reforms. It is noteworthy that one of the major policy focuses of the government is to push forward structural reforms, especially the ‘supply-side reforms’; the five major tasks of ‘supply-side reforms’ include tackling the overcapacity problem, reducing housing inventories, de-leveraging, reducing costs on enterprises and shoring up weak areas. We predict that, as the positive impact of the booming property market and the government’s moves to lower taxes and fees unfolds, China’s economic growth will be relatively stable, albeit with some fluctuations, in coming future. Going forward, we expect the headline PMI to hover around 50 in 3Q16. We also forecast the real GDP growth to be around 6.7% yoy in 3Q16. That being said, challenges facing Chinese manufacturers remain, including greater economic uncertainty caused by the ‘Brexit’ decision, increasing labour and environmental costs, intense competition in the international market, a rise in foreign trade protectionism and weaker luxury spending. Overall, we expect that the industrial production (VAIO) growth will stay stable or rebound a bit to 6.2% yoy in 3Q16.
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