China: Solid PMI numbers all around – Westpac

Elliot Clarke, Research Analyst at Westpac, explains that July was a solid month for the Chinese NBS manufacturing and non-manufacturing PMIs, with the headline series holding a little below their long-run average.

Key Quotes

“Further, for a second month in a row, the Caixin manufacturing PMI rose to now be in line with its long-run average.”

“Taken together, these results indicate that the September quarter got off to a good start following a stronger than expected first half. This suggests that authorities 6.5% 2017 full-year GDP forecast will be comfortably exceeded.”

“Of late, the manufacturing PMIs have indicated that external demand for Chinese manufactured goods has improved such that export orders are best considered at or above trend. Foreign demand for services has also firmed to an above-average level.”

“Contrasting total orders to export orders across the three surveys, it is apparent that domestic demand does not have the same degree of momentum as the external sector. However, the pace of domestic growth still remains robust.”

“Where there remains a risk for the Chinese economy is employment. All three surveys have reported a moderation in the pace of employment growth of late.”

“This does not mean that employers are shedding staff, but rather that they are less inclined to add to their workforce. Instead, any need for additional capacity is more likely to come from existing employees working extra hours.”

“This reticence to employee new staff also likely means that most firms will continue to take a cautious approach to investment in plant and machinery.”

“Greater pricing power and/or a further strengthening in demand will be necessary to justify an improvement in employment and investment. With authorities taking a back seat on investment and aggregate momentum to slow, this will need to come from the external environment.”

“Our overall conclusion is that, while momentum will remain solid in the months ahead, external demand is unlikely to offset softer domestic conditions. Aggregate growth will moderate, albeit only slowly.”