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China's two manufacturing stories: which to believe?
One measure of factory activity in China indicated contraction, another showed expansion. Analysts' opinions signal renewed optimism
The HSBC final flash PMI figure for May showed that Chinese factory activity shrank for the first time since October, contributing to increased worries that the world's second-largest economy is heading for a slowdown.
The HSBC/Markit Purchasing Managers' Index (PMI) for May was 49.2 from April's 50.4; 50 is the mark separating contraction from expansion.
But the official figure for factory activity, the NSB's PMI, actually expanded more than markets had expected, coming in at 50.8 last month from April's 50.6 and exceeding market forecasts of a reading of 50.
"The official report and the HSBC one go the opposite direction one-third of the time, mostly due to difference in seasonal adjustment methods. We suspect this is the reason again this time," Societe Generale's China economist Wei Yao said in a market note.
Another reason for the divergent trajectories of the two indices could be that they measure activities in different types of company.
While the official PMI focuses on big, mostly state-owned enterprises, the HSBC flash PMI accounts more for small and medium-size enterprises.
"With exports doing less well than domestic sales, the Markit-HSBC PMI does less well than the official one," RBS China economist Louis Kuijs explained, noting that "the sub index in the official PMI for small and medium-sized enterprises (SMEs) actually worsened in May."
For Bank of America Merrill Lynch economists Ting Lu and Larry Hu, the official PMI figure is a positive for markets.
They note that there is a "moderate rise" of the official PMI from an average of 50.5 in the first quarter, and consequently they expect a rebound in quarter-on-quarter growth to between 1.9%-2% in the second, third and fourth quarters.
But as the PMI data are "not that impressive," they expect year-on-year GDP growth to remain between 7.5% and 7.7% over the same period.
JOBS WATCHED
The employment component slid to 48.8 in May from April's 49; the component has been below 50 for nearly a year.
"The continued deterioration of the employment situation might be due to the ongoing automation, falling labour force due to aging population and a rising percentage of migrant workers shifting to the service sector," the BofA Merrill Lynch analysts said.
They do not believe the government is likely to offer new stimulus at this stage, as the data still indicates a robust economy.
Societe Generale's Yao, however, says that the employment index is something to watch in order to gauge whether the government will step in to help the economy.
"The relatively resilient job market has been the major factor that allows policymakers to tolerate the growth slowdown so far," she wrote.
"If weak manufacturing job creation continues, they will feel the heat and have to act. Nonetheless, even in that case, fiscal easing in the form of tax cuts should be preferred."
Analysts at Danske Bank say that the official PMI data is "most consistent with the development in leading indicators which have so far not indicated renewed deceleration in the Chinese economy."
They expect GDP growth to remain around 8% in the coming quarters and to improve slightly in the second half of this year.
"GDP growth needs to ease below 7.5% before Chinese policymakers will consider additional easing," they said.
- Follow us on twitter @emrgingmarkets
The HSBC/Markit Purchasing Managers' Index (PMI) for May was 49.2 from April's 50.4; 50 is the mark separating contraction from expansion.
But the official figure for factory activity, the NSB's PMI, actually expanded more than markets had expected, coming in at 50.8 last month from April's 50.6 and exceeding market forecasts of a reading of 50.
"The official report and the HSBC one go the opposite direction one-third of the time, mostly due to difference in seasonal adjustment methods. We suspect this is the reason again this time," Societe Generale's China economist Wei Yao said in a market note.
Another reason for the divergent trajectories of the two indices could be that they measure activities in different types of company.
While the official PMI focuses on big, mostly state-owned enterprises, the HSBC flash PMI accounts more for small and medium-size enterprises.
"With exports doing less well than domestic sales, the Markit-HSBC PMI does less well than the official one," RBS China economist Louis Kuijs explained, noting that "the sub index in the official PMI for small and medium-sized enterprises (SMEs) actually worsened in May."
For Bank of America Merrill Lynch economists Ting Lu and Larry Hu, the official PMI figure is a positive for markets.
They note that there is a "moderate rise" of the official PMI from an average of 50.5 in the first quarter, and consequently they expect a rebound in quarter-on-quarter growth to between 1.9%-2% in the second, third and fourth quarters.
But as the PMI data are "not that impressive," they expect year-on-year GDP growth to remain between 7.5% and 7.7% over the same period.
JOBS WATCHED
The employment component slid to 48.8 in May from April's 49; the component has been below 50 for nearly a year.
"The continued deterioration of the employment situation might be due to the ongoing automation, falling labour force due to aging population and a rising percentage of migrant workers shifting to the service sector," the BofA Merrill Lynch analysts said.
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They do not believe the government is likely to offer new stimulus at this stage, as the data still indicates a robust economy.
Societe Generale's Yao, however, says that the employment index is something to watch in order to gauge whether the government will step in to help the economy.
"The relatively resilient job market has been the major factor that allows policymakers to tolerate the growth slowdown so far," she wrote.
"If weak manufacturing job creation continues, they will feel the heat and have to act. Nonetheless, even in that case, fiscal easing in the form of tax cuts should be preferred."
Analysts at Danske Bank say that the official PMI data is "most consistent with the development in leading indicators which have so far not indicated renewed deceleration in the Chinese economy."
They expect GDP growth to remain around 8% in the coming quarters and to improve slightly in the second half of this year.
"GDP growth needs to ease below 7.5% before Chinese policymakers will consider additional easing," they said.
- Follow us on twitter @emrgingmarkets
03 Jun 2013
