Hongbin on the HSBC PMI reading this mng, and Ive also attached further below our rundown of the Taiwan PMI as well ..
At the same print as last week’s flash reading of 50.1, the final reading of June’s HSBC PMI confirms that both activity and inflation in manufacturing sector continue cooling. This implies that policy tightening is working, and points to a peaking of inflation soon. Despite a slowdown, industrial output is still rising by 12-13%y-o-y, fully consistent with a GDP growth rate of around 9%. Inflation will continue to outweigh growth as the biggest near term macro risk for China.
Final manufacturing PMI slowed to an 11-month low of 50.1 in June (vs. 51.6 in May), the same as last week’s initial flash reading, so confirming the ongoing slowdown of the world’s largest manufacturing sector. The output
sub- index also fell below the critical 50 line (though only by a margin at
49.8) for the first time since last July. This is attributed to the continuous slowdown of new business flows (50.4 in June vs. 52.6 in May) and faster depletion of finished goods stocks (46.7 in June vs. 48.6 in May).
Demand is cooling in response to recent domestic tightening measures, but coupled with the impact of impact of the Japanese earthquake filtering through Q2, external demand and hence new export orders also slid further – with the sub-index dropping to a 27-month low of 46.7 in June from 49.7 in May. Slowing new business flows also lead to a marginal reduction in China’s employment level (49.8 in June vs. 51.3 in May).
On a brighter note both input and output prices inflation continued to ease in June. Similar to the results of the flash PMIs, the input prices sub-index recorded an 8.2pts decline compared with the previous month at
51.9 in June, its lowest level since last July and also for the first time below the long term average of 60. The pass-through to downstream product prices is also slowing in line with cooling demand. The output prices sub-index cooled to 50.9 in June from 54.3, also its lowest level since last July.
Despite the slowdown amidst credit tightening, inventory cycle and slackness in external market, there is no need to worry about hard landing (See Video: Will there be a hard landing for China? : The impact of policy tightening and China Inside Out: Interior growth engine). For the manufacturing sector, the current PMI reading still supports a 12-13% y-o-y growth rate for industrial output. Recall last July when the PMI last fell below 50, IP growth still expanded by nearly 13%yoy. As the effects of inventory destocking and post-quake disruptions fade in 2-3 months, China’s manufacturing sector will likely regain momentum. For the services sector, May’s services PMI reported firm expansion and rapid job creation. This, plus the still rapid pace of domestic income growth should continue to support private consumption. More importantly, despite intensifying credit tightening, M2 is still growing at around 15% – a rate that remains sufficient to support a GDP growth rate of around 9% for the rest of this year.
We have been long argued slower growth is helpful for containing inflation, as evidenced by the cooling of inflation in China’s manufacturing sectors.
That said, headline inflation will likely continue to head north of 6% in June thanks to a low base effect, higher food inflation and rising rental costs. Its slowdown will likely to be gradual over 3Q, not least because of the recent unfavourable turn in weather conditions which have disrupted food production. In other words, inflation will continue to outweigh growth as China’s top macro risk.
Bottom line: Worries over growth are unwarranted. The current level of PMI is still consistent with around 9% GDP growth. Given rising headline inflation, the PBoC will likely keep its foot on the tightening pedal for another 2-3 months.