China – Slight Improvement in PMI Surveys in May

The official PMI (public sector) rebounds slightly in May to 50.8 against 50.4 in April. The average in the second quarter stopped to May is 50.6 against 50.3 in the first three months of the year.
Ten days ago, Markit (private sector) had also revealed a slight improvement in its indicator (Advanced and not final) to 49.7 against 49.1 in April and an average over the second quarter of 48.9 against 48.7 in Q1.
The graph below shows the fragility of the recovery. Indices remain near 50, a threshold which reflects the stability of the manufacturing activity.
China-2014-May-PMI-off-MarkitAmong the components of these indices, new orders are important for the forthcoming momentum. We can calculate the ratio of the New Order on Stocks to anticipate the expected production profile.
China-2014-May-PMIratioThe level is stationary for the private sector (Markit). We cannot conclude a lasting improvement in the dynamics. Same conclusions hold for the official index even if it is at a higher level (1.11 against 1.03 for the Markit). One can also observe that the new export orders index continues to deteriorate for the official index (49.3 against 49.1 in April), while it increased substantially for the private index (52.7 against 48.9 in April).

This limited but positive dynamics associated with New Orders in the official index may nevertheless reflect the moderate support from economic policies. Even if there are far from 2009 drastic measures, we note that monetary policy is occasionally a little less binding and activity programs are implemented through fiscal policy. In the first case it is the decline in the rate of required reserves for rural banks (200bp) and cooperatives (50bp) and facilities provided by some banks (for shantytowns upgrading for example). For fiscal policy, there are options on infrastructure projects (clean energy, petrochemicals sector), on the railway network (RMB 800bn this year against 664 in 2013) and on water management.

The objective of these measures is to support the business in order to limit the risk of a break given the slowdown in the real estate sector. However, the Chinese economy will remain on a slow dynamics

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