China: PMI reports showed economy carrying significant momentum - Westpac

Elliot Clarke, Research Analyst at Westpac explains that China’s official September PMI reports showed an economy carrying significant momentum, emphasising that risks to growth in the second half are to the upside.

Key Quotes

“This is despite the ongoing actions of authorities to reign in excess in the housing market and the financial system.”

“The strongest of the official surveys was the manufacturing PMI which rose to 52.4 in September, a high back to 2012 and 0.4ppts above its long-run average.”

“Manufacturers continue to benefit from the upturn in residential construction; the tail-end of the public works program which was at its peak in 2016; and solid external demand.”

“Notably the largest manufacturers are benefitting the most. Contrast the September fall in the Caixin PMI, which is skewed more towards small and medium-sized firms, against the rise in the NBS measure. Though, even after September’s fall, the Caixin series is still at its long-run average.”

“New orders are positive overall, but carry more momentum at the big firms.”

“Turning to the services sector, there we also saw a strong result in September, with the monthly outcome being the highest since 2014. As for the manufacturing sector, new business is positive, implying that current momentum will persist into year end.”

“The downside risk to the aggregate growth story continues to come from employment which, despite the momentum in activity, remains materially below long-run average levels. This points to an ongoing focus on efficiency and profitability rather than a desire to expand permanent capacity.”

“In the long-term, if the consumer is to become responsible for a greater share of aggregate activity, then higher-value jobs must be created and remunerated accordingly. There is limited evidence of this occurring at present.”

“We remain positive on growth in China in 2017 and 2018, with near-term risks to the upside. But it will be the industrial sector that primarily drives this result, with many changes necessary if the consumer is to come more to the fore.”