Three research groups’ views of China’s manufacturing PMI [SoberLook]


China’s manufacturing PMI (flash) unexpectedly increased in July. Production and new orders showed improvement. Is it possible that China’s slowdown has ended and manufacturing growth is beginning to re-accelerate? Here are views from three research groups that focus heavily on China:

1. Goldman is quite bullish, pointing out that this will translate into a strong industrial production number.

GS: – We see this as a very strong reading. Unlike the official PMI, the HSBC/Markit PMI does not have obvious seasonality problems. The index still rose by 1.3 ppt after making a standard x12 seasonal adjustment. This magnitude of rise in one month is significant.

Contrary to popular interpretation, the fact that the level of the index was below the 50% threshold does NOT mean manufacturing activities were experiencing negative growth/contraction. Conceptually, a sub-50% reading means “there was a larger number of respondents who said their production was down from the month before than those who replied production was up”. This is not necessarily the same as “the level of production of all the companies surveyed fell”. While the relationship is not totally stable, historically, when the HSBC/Markit PMI is at the 50% levels, yoy and mom industrial production (IP) growth tends to be in the low 10% levels, which is a very long way off from a contraction (interestingly, the PMI is more closely correlated with yoy IP despite the fact the survey asks companies about changes compared with the previous month, which should correspond with mom IP). When sequential IP falls to sub-zero levels, the PMI would be at around 45%.

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