China: Mixed signals in service and manufacturing PMIs – ING

Iris Pang, Economist at ING, points out that China’s both service and manufacturing PMIs decelerated, but small and medium manufacturing activities contracted which produce mixed signals on growth.

Key Quotes

“It turned out that we were too optimistic on both non-manufacturing and manufacturing PMIs in July. Non-manufacturing PMI lowered to 54.5 from 54.9 (INGF: 55.1). Two subindicators, new orders and existing orders, inched lower reflecting shrinking services from real estate sector. For the rest of the service sectors, our optimism still holds, that is, summer holiday has become a seasonal booster in China that has only emerged as an obvious seasonal pattern within past few years.”

“On manufacturing, PMI data showed that only large enterprises experienced expanding activities, while medium and small enterprises fell again into contraction after expanding for more than a quarter. The diverging growth path of large enterprises and small to medium enterprises highlights deleveraging in overcapacity industries continues, which hurts small to medium firms more than large corporates.”

“Looking forward in 3Q, service sector growth would continue to surpass manufacturing. Rising wages (5% to 15% depending on province and industry) is an important engine to push service activities. And, we continue to be optimistic about manufacturers. External trade would be a catch-up factor to keep the official manufacturing PMI stable.”

“We don’t think stronger CNY (INGF: 6.72 end 2017) would put pressure on exports as statistics show that the two has weak direct relationship. During the last 12 months, correlation between export and USDCNY was low (0.046). But manufacturers could face lower profit margins as they would incur higher hedging costs.”