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China sees a gradual economic recovery on the way
By Sun Junwei and Qu Hongbin |
October 30, 2012, Tuesday
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Print Edition
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OCTOBER'S flash HSBC manufacturing Purchasing Managers' Index rose to a three-month high of 49.1, suggesting that growth has likely bottomed and is heading for a gradual recovery into the fourth quarter thanks to earlier easing measures.
However, external challenges still abound with pressures in job market still lingering. With inflation still under control, this calls for a continuation of policy easing in the coming months to secure a firmer growth recovery.
Headline PMI ticked up for the second consecutive month to a three-month high of 49.1 in October's flash reading (vs. 47.9 final in September), thanks to slower contraction of new business in both the domestic and oversea markets. Total new orders rose to a six-month high of 49.7 (vs. 47.3 previously) and new exports orders at a five-month high of 47.3 (vs. 44.9 previously).
Output sub-index rose to a three-month high of 48.4 (vs. 47.3 previously), as finished goods inventory starts to deplete (47.9) following five successive months of accumulation. However, with the output sub-index still in contraction, hiring activities remained constrained with the employment index unchanged at 48.3 (below the 50 line for the eighth consecutive month).
However, growth momentum as measured by the new orders minus finished inventory ratio jumped to a twelve-month high of 1.8 in October (vs. -2.9 previously), ending five consecutive months of negative readings.
On inflation, both the input prices and output prices sub-indices returned to expansionary territory after the previous five months of contraction. The input prices sub-index jumped to 53.3 from 43.4 in September, thanks to the warming-up of inputs purchases (48.9 vs. 47.4 previously). Output prices also recorded a small increase (50.6). That said, both price indices remained well below the series's long-term average (input prices: 58.4 and output prices 52.4).
Following a better-than-expected improvement in September's growth data, the flash results of HSBC PMI suggest that manufacturing activities continued to recover this month, thanks to a relative improvement in new business flows and the likely conclusion of China's destocking process.
This reflected the filtering-through of earlier easing measures: accommodative liquidity conditions, accelerated infrastructure investment growth and fiscal spending. All these support a pick-up of domestic demand and boosting of business confidence.
Another relatively positive sign is the sequential pick-up of inflationary pressures, especially for input prices, in tandem with the improvement of new business. Indeed, the prices of steel and cement have rebounded notably in recent weeks, benefiting from the accelerated construction of infrastructure and property projects. Both production and consumer prices inflation likely bottomed in September and will see a modest rebound in the coming months, due to base effect and improving demand conditions.
Nonetheless, inflation risks should remain manageable in the coming months, not least because of a negative output gap and still stable food prices. China's major macro risk is still tilted towards growth. External challenges and job market slackness post downside pressures on growth.
Although a slower pace of contraction in this month's new export orders was likely helped by Christmas orders and the recent stabilization of the US economy, China's exports outlook remains challenging - given an ongoing recession in Europe and the risks associated with the looming fiscal cliff in the US.
Going forward, policy easing must be continued to secure a firming up of China's recovery in the coming months. More fiscal power is expected to be unleashed, after the accelerated fiscal spending in September. Monetary easing is also likely to stay in place to ensure favorable liquidity growth. Quantitative easing either in the form of liquidity injection through open market operation or reserve requirement ratio cuts will likely continue to be the primary tools.
Sun Junwei is the China economist with HSBC. Qu Hongbin is the co-head of Asian economics research with HSBC.
However, external challenges still abound with pressures in job market still lingering. With inflation still under control, this calls for a continuation of policy easing in the coming months to secure a firmer growth recovery.
Headline PMI ticked up for the second consecutive month to a three-month high of 49.1 in October's flash reading (vs. 47.9 final in September), thanks to slower contraction of new business in both the domestic and oversea markets. Total new orders rose to a six-month high of 49.7 (vs. 47.3 previously) and new exports orders at a five-month high of 47.3 (vs. 44.9 previously).
Output sub-index rose to a three-month high of 48.4 (vs. 47.3 previously), as finished goods inventory starts to deplete (47.9) following five successive months of accumulation. However, with the output sub-index still in contraction, hiring activities remained constrained with the employment index unchanged at 48.3 (below the 50 line for the eighth consecutive month).
However, growth momentum as measured by the new orders minus finished inventory ratio jumped to a twelve-month high of 1.8 in October (vs. -2.9 previously), ending five consecutive months of negative readings.
On inflation, both the input prices and output prices sub-indices returned to expansionary territory after the previous five months of contraction. The input prices sub-index jumped to 53.3 from 43.4 in September, thanks to the warming-up of inputs purchases (48.9 vs. 47.4 previously). Output prices also recorded a small increase (50.6). That said, both price indices remained well below the series's long-term average (input prices: 58.4 and output prices 52.4).
Following a better-than-expected improvement in September's growth data, the flash results of HSBC PMI suggest that manufacturing activities continued to recover this month, thanks to a relative improvement in new business flows and the likely conclusion of China's destocking process.
This reflected the filtering-through of earlier easing measures: accommodative liquidity conditions, accelerated infrastructure investment growth and fiscal spending. All these support a pick-up of domestic demand and boosting of business confidence.
Another relatively positive sign is the sequential pick-up of inflationary pressures, especially for input prices, in tandem with the improvement of new business. Indeed, the prices of steel and cement have rebounded notably in recent weeks, benefiting from the accelerated construction of infrastructure and property projects. Both production and consumer prices inflation likely bottomed in September and will see a modest rebound in the coming months, due to base effect and improving demand conditions.
Nonetheless, inflation risks should remain manageable in the coming months, not least because of a negative output gap and still stable food prices. China's major macro risk is still tilted towards growth. External challenges and job market slackness post downside pressures on growth.
Although a slower pace of contraction in this month's new export orders was likely helped by Christmas orders and the recent stabilization of the US economy, China's exports outlook remains challenging - given an ongoing recession in Europe and the risks associated with the looming fiscal cliff in the US.
Going forward, policy easing must be continued to secure a firming up of China's recovery in the coming months. More fiscal power is expected to be unleashed, after the accelerated fiscal spending in September. Monetary easing is also likely to stay in place to ensure favorable liquidity growth. Quantitative easing either in the form of liquidity injection through open market operation or reserve requirement ratio cuts will likely continue to be the primary tools.
Sun Junwei is the China economist with HSBC. Qu Hongbin is the co-head of Asian economics research with HSBC.
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