Chinese manufacturing slowing but remains expanding and may indicate more monetary stimulus to come

Analyst Commentary, Matthew Bovencamp: On June 1st China’s official purchasing managers’ index[1] hit the lowest level in six months. The index was at 50.4[2]  in May, down from 53.3 in April. The May index value was the sixth straight month the PMI value was above 50.0, implying that manufacturing is still expanding in the world’s 2nd largest economy, although at a much slower rate compared to the prior two months. The graph below displays the Chinese PMI since May 2011.

China's PMI

China PMI

Source: National Bureau of Statistics of China

The sharp decline in the PMI underscores the fragility of the global markets and their correlations as many other countries reported similar contracting PMI values in June (for the month of May). Chinese small enterprises were hit the hardest with a month-on-month decrease of 3.9 to 45.2, the second consecutive month below 50. The PMI for medium and large-sized enterprises decreased by 2.6 and 2.7 to 50.8 and 51.1, respectively. Both domestic and foreign demand contracted in May to 48.1 and 50.4, based on the import index and foreign new orders index.

Since November 2011, the reserve ratio was reduced three times and in June 2012 the benchmark interest rate was cut in an effort to spur growth. However, the recent resurgence of Europe’s difficulties and the US showing signs of slowing down continue to put pressure on Chinese and global manufacturing indices. Although the PMI remains above 50.0, we believe the Chinese central bank will take further measures to stimulate the economy. China still has room to use monetary policy to spur growth, and we believe such action would be the logical step in the coming months in order to boost economic activity.    

References: National Bureau of Statistics of China (May 03), The China Perspective (Jun 21) 

Notes:

[1]Published by the China Federation of Logistics and Purchasing

[2]An index value over 50.0 indicates an improvement in market conditions and an expansion in manufacturing, whereas a value less than 50.0 indicates deterioration in market conditions and a contraction in manufacturing 

 

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