Broker's View

China’s official manufacturing gauge for April indicates moderate recovery, but analysts flag deepening systemic risks

National Bureau of Statistics’ release shows official purchasing managers index for April holds above the key 50-level indicating expansion

PUBLISHED : Tuesday, 03 May, 2016, 4:13pm
UPDATED : Tuesday, 03 May, 2016, 7:12pm

China’s official manufacturing purchasing managers index (PMI) in April indicated a moderate recovery of the domestic economy driven by government stimulus, although confidence among large manufacturers remains weak, analysts said.

The official manufacturing PMI in April came in at 50.1 on a 100-point scale over the weekend, according to the National Bureau of Statistics, missing market consensus of 50.3 per cent and down from 50.2 per cent in March.

“Overall demand remains on the expansionary path,” CICC analysts Liang Hong and Eva Yi wrote in a note. Most sub-indexes tracked by the PMI retreated after the sharp cyclical rebound in March, implying “normalising but upbeat” growth momentum, they wrote.

Domestic manufacturing demand remains solid, as the New Orders Index printed at 51 per cent, compared with 51.4 per cent in March.

Meanwhile, the New Export Orders Index, printed at 50.1 per cent, down from 50.2 per cent in March, was higher than the average of 47 per cent during the second half last year.

“That represents export demand may start to bottom out on the sequential basis,” the CICC analysts said.

With the Raw Material Inventory and Finished Product Inventory Indexes both pointing to declining stockpiles of goods and materials, China is showing strong momentum and sustainability in the end demand growth, CICC said.

Guotai Junan Securities analysts Ren Zeping and Xiong Yiming said the fall of the two inventory indexes shows the cyclical economic rebound was driven by property sector and government stimulus, while enterprises were still reluctant to restock amid weak confidence in economic growth.

ANZ Research analyst Raymond Yeung pointed out that the PMI was underpinned by large enterprises, suggesting that fiscal intervention remains a critical growth driver.

The Caixin manufacturing PMI, which focuses more on small and medium sized firms, was 49.4, marking the 14th straight month below the 50 reading which separates contraction from expansion, and missing market expectations of 49.8.

Improvements in the steel sector, which appear to be underpinning the expansionary reading in PMI, is a source of concern, Yeung said.

“The PMI for the steel industry rose 7.5 points to 57.3 in April, the first expansionary figure after 19 months,” Yeung wrote, “We should be vigilant to the role of commodity financing [in this improved reading].”

Still, the PMI bodes well for April’s economic data to be released in the next two weeks, Yeung said in a note.

China’s trading data and foreign exchange reserves for April will be announced this weekend, followed by inflation data on May 10.

“Despite the moderation, we think the above-50 PMI print is consistent with our existing views on improving growth momentum in the second quarter. Near term, we still see support for growth from a faster-than-expected rebound in the property market, strong credit growth, as well as accommodative macro policies,” Barclays said in a note.

The improving economic sentiment will likely prompt the People’s Bank of China to fine tune its monetary policy to “moderately accommodative,” Yeung said. ANZ now expects only one more cut in the reserve requirement ratio this year, instead of three.

Barclays believes the PBOC will put on hold any reduction of interest rates until the second half, while lowering banks’ required reserve ratio by 150 basis points before year end.

“A cyclical recovery may broaden out to more industries in the next few months,” CICC’s Liang and Yi said.

Guotai Junan Securities’ Ren said in long term, the rebound in activity was at the cost of rising corporate debt, continued excess capacity in key industries, and expectations on higher inflation, which will make it more difficult for the government to bring about important reforms.