China: manufacturing PMIs appear to have peaked, possible stimulus limits downside risk

The flash estimate for China’s Markit/HSBC manufacturing PMI in August declined to 50.3 (consensus: 51.6, DBM: 51.9) from a final reading of 51.7 in July. This is the lowest level since May.

The details were also relatively weak with new orders declining to 51.3 from 53.3 and new export orders declining to 51.4 from 52.6. So both domestic demand and exports appear to have lost some momentum in August according to the manufacturing PMI.

On a positive note, there were no signs of a substantial inventory build-up. The finished goods-inventory component was unchanged at 49.5 and the inventory component for input purchases declined markedly to 48.5 from 51.0 in July. Nonetheless, the new order-inventory balance deteriorated slightly in August.

The decline in the Markit/HSBC manufacturing PMI comes on the back of weak data for July with the exception of exports, which were strong in July according to the foreign trade data. It does appear that the Chinese economy has again lost momentum. There are in our view three possible explanations: 1) continued weakness in the property market, 2) the impact from fiscal stimulus has started to wane with infrastructure spending showing signs of slowing in July and 3) the accelerated corruption campaign in recent months could also have started to weigh on investment demand.

At this early stage it does look like the manufacturing PMIs have peaked. So far our view has been that the manufacturing PMIs would peak in September/October around 52. The peak appears to have come a bit earlier. For that reason there is also downside risk to our GDP forecast (Q2: 8.2% q/q ann., Q3E: 9.0% q/q ann., Q4E 7.8% q/q ann.)

In our view more substantial monetary easing has moved closer, albeit the Chinese government has been reluctant to use monetary stimulus and has preferred fiscal stimulus instead. The arguments are: 1) credit growth very slow in July, 2) house prices are now declining and 3) inflation at 2.3% y/y substantially below the 3.5% y/y threshold and could decline furtherer. In our view an interest rate cut could be a real possibility now but it is too early to make that call. The possibility of a more substantial easing move should limit downside risk to the Chinese economy.