China: The recovery gains strength

• Both of China’s manufacturing PMIs improved further in October, suggesting that the Chinese recovery remains strong and might even be gaining further strength following a slowdown during Q3. This suggests GDP growth of around 12% q/q AR in Q4.
• So far there are no signs that the export recovery is losing steam. It increasingly looks as if stronger exports will offset the negative impact from lower public investments, when the impact from the fiscal stimulus starts to wane.

Bottom line

Both of China’s manufacturing PMIs improved further in October, suggesting that the Chinese recovery remains strong and might even be gaining further strength following a slowdown during Q3. In Q3 growth in industrial production slowed to 3.5% q/q following a 6.6% q/q surge in Q2. Today’s manufacturing PMIs suggest that the growth in industrial production in Q4 should at least be able to maintain the pace from Q3 and might even accelerate slightly. This suggests GDP growth of around 12% q/q AR in Q4.

Details

Total new orders were a bit mixed, increasing markedly in the NBS PMI and declining slightly in the HSBC PMI. However, new orders remain elevated and overall the new order-inventory balance remains favourable, suggesting that growth in industrial production will remain strong in the coming months (see charts on next page). Importantly, export orders increased significantly in October in both HSBC and NBS PMI. According to our calculations, total exports in Q3 increased 8.0% q/q in current USD following a 0.3% q/q decline in Q2 and so far there are no signs that the export recovery is losing steam. It increasingly looks as if stronger exports will offset the negative impact from lower public investments, when the impact from the fiscal stimulus starts to wane.

In addition, there are signs that inflationary pressure has eased in recent months. Both finished goods prices in the HSBC PMI and finished goods prices in NBS PMI declined slightly. This is consistent with consumer price increases having stabilised around 2.0% 3m/3m AR. That said, we still expect inflation to pick up further to around 3% q/q AR in Q1 10, which is usually regarded as the critical level for the People’s Bank of China (PBoC).

Impact and outlook

Overall today’s manufacturing PMI has not changed our view of the Chinese economy, albeit the risk of a substantial slowdown when the fiscal stimulus wanes appears to be easing. We still expect PBoC to start tightening in Q1 although we do not expect PBoC to hike its leading benchmark lending rate until Q2.