The spread between HSBC's and China's version of Manufacturing PMI increased a little over the weekend when the headline of China's data point managed to cling perilously above the 50-line of expansion over contraction (while HSBC's drifts lower and lower under 50). The headline print - still its lowest since Nov 11 - however, hides a much less sanguine truth in the sub-indices with the new orders index fell once again staying in the contractionary territory under 50. What is more worrisome for China (and implicitly the rest of the world) is that while transport equipment and electrical machinery improved (explicitly thanks to government funded infrastructure projects) there has been no multiplier effect of a broad-based investment rebound.
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As Credit Suisse notes: "The stimuli launched in middle of May seems to have failed to jump-start the overall economy, yet the moderation in PMI is not severe enough to justify a much more aggressive rescue package. Stripping out the direct benefits from Beijing’s stimuli, we think the economy is still moving downwards."
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It seems the harsh housing policies are limiting any ability to bring out a big bazooka from fiscal or monetary and perhaps, just perhaps, the Chinese are languishing at the start of a housing-fueled balance sheet recession-style weakness - though it appears (given the weak demand, increased input prices, and drop in new export orders) that global growth contagion is just a painful for the Chinese as for the rest of the world living off their teet.
Credit Suisse: Policy implications
The stimulus measures launched in middle of May seem to have failed to jump-start the overall economy, yet the moderation in PMI is not severe enough to justify a much more aggressive rescue package, in our judgment. Despite improved orders in machineries, the overall order flows were rather disappointing. Stripping out the direct benefits from Beijing’s stimulus measures, we think the economy is still moving downwards. Given that most of the funding has been one-off in nature from the central government’s budget or a bank loan, if the package cannot lift growth in June and July, it probably won’t. Still, headline PMI remains in expansionary territory, so we do not anticipate another major stimuli on the horizon.
We continue to expect three more cuts to the RRR (one cut per quarter) and two more cuts in the lending rates (once per quarter), but do not believe that monetary policies will be effective given that the economy appears to be in a liquidity trap.
Fiscal policy may be a little more effective, but most policies probably cannot be unleashed until March 2013 when the new administration comes into office. Unless the economy shows more concrete signs of a hard-landing, we expect only a piecemeal approach from Beijing in terms of growth promoting initiatives.
Housing policy is probably is a more effective policy measure than monetary or fiscal policy, in our view. We do not expect Beijing to remove the harsh headline statement about being “unwaveringly firm” against speculations in the property sector, but do expect it to be less restrictive on local government measures to help the local markets. With transaction volumes continuing to rebound, we think construction activity in the nonmanufacturing PMI due on 3 July is an important data point.
Meanwhile, we continue to warn that deflationary forces are gathering, supported by the very weak input price index. This development may affect a series of market behaviors, from consumption to investment.