Chinese PMI Suite Hints at More of the Same GDP Growth - TDS
Annette Beacher, Chief Asia-Pac Macro Strategist at TD Securities, suggests that the PMI prints are really only as useful as their predictive power, and for China they remain frustratingly unreliable.
Key Quotes
“Nevertheless, after Fed Chair Janet Yellen this week emphasized uncertain Chinese growth and its policy reaction function when assessing risks to global growth, markets can at least breathe a sigh of relief that the PMI suite rebounded convincingly in March (after widespread disappointment in February).
Official manufacturing PMI rebounded from 49.0 to 50.2 in Mar (TD 50.0, mkt 49.4), led by imports (50.1) and exports (50.2) - both having been in negative territory for at least the last 18 months. Output PMI jumped from 50.2 to 52.3. Nonmanufacturing PMI added 1.1pt for a solid 53.8. Caixin PMI jumped from 48.0 to 49.7 in Mar (TD 49.0, mkt 48.3), but added to a “sigh of relief” here rather than sparking fresh risk appetite. For example, AUD (China’s sentiment proxy) swiftly jumped to $US0.77 on the first PMI report, but the rally was faded and so retreated to opening levels. Perhaps the European time zone responds to the better PMI prints?
If we average the two PMIs (official and Caixin) and compare with industrial production, we can ‘conclude’ that PMIs of around 50 are consistent with industrial production growth of around 8%/yr (first chart). Anyone believe this will happen for March IP? Hence our opening sentence. After decades of overcapacity in heavy industries, we should welcome a continued orderly slowdown in this sector (even if a negative for commodity demand). While there are many skeptics of the ‘engineered’ rise of the services industry, we should at least start paying attention to services PMIs as well. Official non-manufacturing PMI of 53.8 is good news on that front, i.e. well into the expansion zone, but remains far short of demonstrating a convincing uptrend (second chart).
The March quarter PMI average for the official measure is 49.5, while for Caixin is 48.7, on balance on par with the Dec qtr 2015 averages (third chart). On that basis we would expect GDP to expand at a similar rate of 6.8%. Another way of looking at PMIs and GDP is to compare the change in the PMI with the change in annual GDP growth, and for Mar qtr there is scant downside from the official PMI and upside from Caixin. While the predictive power of this analysis isn’t reliable or accurate either, we still conclude that 6.8% GDP growth is likely to continue into the Mar qtr.”
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