China: Strong manufacturing output and new orders - ING

Iris Pang, Economist at ING, explains that China posted strong manufacturing output and new orders but real estate services drove down the non-manufacturing headline PMI.

Key Quotes

“Manufacturing PMI went up to 51.7 (INGF: 51.5; consensus:51.3; prior: 51.4). Looking into the details we find that the strong headline number was supported by robust output and new orders. That means domestic demand from infrastructure and consumption of goods have supported the economy.”

“The new export orders number was still above 50 (50.4; prior 50.9) but falling now for two months in a row.”

“One phenomenon that we observe is that high input prices and business sentiment went up at the same time. This shows that the clean-up of overcapacity in steel and coal are yielding results. As the number of coal and steel producers decreases, supply has shrunk, pushing up coal and steel prices. And because there are fewer zombie factories in the market, manufacturing business sentiment is improving.”

“In contrast, the non-manufacturing PMI fell to 53.4 (INGF: 54.2; prior: 54.5). Hot weather could be one of the reasons, especially for August, which is usually a month that records lower non-manufacturing PMI. Another reason is that real estate services is an important category in non-manufacturing PMI, which is currently under pressure from tightening housing measures. Other service sectors are doing well, air transport, logistics, software & IT sub-indices were all above 60.”

“Looking ahead, domestic consumption, infrastructure activities and new export orders (as global growth improves) should push manufacturing PMI upward. However, as long as housing tightening measures continue, which we expect, the real estate sub-index will continue to drag on the headline non-manufacturing PMI.”

“We do not think the strong yuan will weigh on export growth as we find little correlation between the two. Exporters are now far more aware of hedging their forex exposure.”

“All in all, both sets of data imply good economic growth in China and the government can continue to focus on reforms.”