By Brian Jackson, China Economist, IHS Markit

Key Points:

  • China’s official manufacturing purchasing managers’ index (PMI) was unchanged at 51.2 in May, according to a release from the National Bureau of Statistics. The index declined in April from a five-year high of 51.8 in March. Output expanded at a slower pace, while inventories and employment contracted less rapidly. Authorities noted that manufacturers of consumer goods PMI rose 1.6 points to 53.8, while small and medium firms respectively rose 1.0 and 1.1 to 51.0 and 51.3. New orders were unchanged, while new export orders grew more rapidly.
  • China’s official non-manufacturing PMI rose 0.5 point to 54.5 in May. New orders grew more rapidly, while new export orders’ pace of contraction moderated. Expectations for future activity improved, although employment conditions deteriorated more rapidly, reversing gains a month prior. A sub-index for services PMI rose 0.9 to 53.5, mostly due to retailing, railway and air freight, and postal and data services; roadway shipping, capital market services, and real estate services were noted as having sentiments in contraction. A sub-index for construction fell 1.2 points to 60.4.
  • Prices contracted sequentially. Sub-indices for manufacturers’ input prices and service’s output prices both fell into contraction. In the case of manufacturing prices, the month-to-month contraction comes after 16 months of expansion in the survey.

IHS Markit Views:

While services’ growth improvement is an encouraging sign after last month’s deceleration, average growth in the second quarter remains below that of the first for both non-manufacturing and manufacturing PMI. In aggregate, this points to a softer GDP reading in the second quarter, hardly a surprise after the unsustainably fast growth rebound earlier in the year.

Of higher concern, however, is that price growth has halted and began to reverse in both surveys. One of the most positive developments early in 2017 was rapid nominal GDP growth, which helped stabilize China’s debt to GDP ratio via inflated firm profits. While price growth stagnating in sequential terms won’t impact year-on-year growth readings for several quarters, it does confirm suspicions that the reflationary trend is unlikely to exceed four quarters. After that China will once again find itself in the predicament of balancing stimulus policy and debt accumulation against its self-imposed GDP growth targets, a calculus which rapid price growth made easier to solve in recent quarters.

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