A record-breaking surge in monthly credit creation and a trillion Yuan of QE-lite was enough to provide a glimmer of hope into the tumbling Chinese economy for one or maybe two months but with the real estate market continuing to free-fall, it should be no surprise that China's PMIs finally catch down to the erstwhile reality simmering under the surface in the ultimate centrally-planned economy. China's official government PMI dropped from 30-month highs, missed expectations and the early month flash print, to less exuberant 51.1 reading (with Steel industry new orders totally collapsing) with both medium- and small-companies printing contractionary sub-50 levels. Then (after Japan's PMI beat - of course it did as hard data crashes worst on record), HSBC China PMI also missed, printing a slightly expansionary 50.2 Showing, as BofA warns "the two PMIs both show that the current recovery is relatively weak and choppy..." and RBS adds "we expect the government to interpret such an outlook as challenging its growth target and to take more, and more significant, measures to support growth."
As Goldman writes,
August official PMI tends to be biased on the upside. Since the data started in 2005, this is the second time it fell in August (first time was August 2012). The degree of seasonality probably has been reduced in recent years but may still exist. This suggests underlying slowdown might be more meaningful, which is consistent with the weak reading of the HSBC PMI.
Almost all components showed signs of cyclical slowdown, which indicates the evidence of an incremental slowdown is conclusive. Among them the new orders and production sub-indexes are particularly important because unlike the headline readings they do not lag mom IP and have a closer fit with mom IP readings. Both fell meaningfully in August. In terms of drivers of weaker orders, export orders fell less than overall orders but the difference was not large.
We believe this weakening reflects less supportive policy stance since July and possibly less supportive underlying exports growth. Gradual deceleration from strong sequential growth in June is consistent with our forecasts, though there is risk of a steeper deceleration if policy and monetary/credit conditions don't ease meaningfully from the July stance. We are still on track to reach the 7.3% GDP forecast for 3Q and the whole year though the risks are largely balanced instead of clearly tilted towards the upside.
Small- and Medium-Sized companies are both in contraction...
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This catastrophic miss by 0.1 points immediately saw Markit's economist proclaim more stimulus was needed and BofA's China-watchers calling for a fresh round of stimulus... or else...
China's NBS manufacturing PMI slowed to 51.1 in August from 51.7 in July. The reading is slightly below the consensus forecast at 51.2, and is in line with the drop of the HSBC flash PMI to 50.3 in August from 51.7 in July. The main drags leading to the decline were output and new orders which fell to 53.2 and 52.5 in August from 54.2 and 52.5 in July respectively. Today's reading confirmed the weakness of the economy and the softening momentum. But since the new leadership is determined to deliver stable growth during their period of power consolidation, especially in the run up to the 4th Plenum in October, we believe Beijing will step up its mini-stimulus in coming weeks. We maintain our 7.4% growth forecast for both 3Q and 4Q.
Why did growth slow down again?
As we explained in our 2H preview, there are three types of headwinds in 2H: the high base effect, the anti-corruption campaign and the downturn in the property sector. The anti-corruption campaign, though definitely positive for growth in the long-term, has hit the economy in the short term. The campaign also made the central government's stimulus effort less effective as local government officials are not incentivized to speed up fiscal spending and investment projects.
A fresh round of stimulus
The Chinese government last week announced a fresh round of mini-stimulus to counter the downward pressure on growth. These measures include an RMB20bn PBoC relending with preferential rate to the agriculture sector, a push for ramping up investment in clean energy and public facilities such as hospitals, nursing homes and fitness centers, and a promise for delivering the target on social housing and more spending on environmental protection.
China’s third-quarter growth tends to be slower, and the level of lending in August will be “very critical” for the economy, Liu said.
“We expect the government to interpret such an outlook as challenging its growth target and to take more, and more significant, measures to support growth,” Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong, said in a note today.
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