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Saving growth needs more stimulus
By Sun Junwei and Qu Hongbin |
June 27, 2012, Wednesday
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Print Edition
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THE flash reading of HSBC China manufacturing Purchasing Managers' Index moderated to 48.1 in June from 48.4 in May, the lowest reading this year. Similar to the previous month, this is mainly driven by a further deterioration of new export orders, which fell by 2.6 points to 45.9 in June - the lowest reading since March 2009. Total new orders also dropped to a seven month low of 46.8 in June (vs. 47.9 in May).
The sluggish new business growth translated into slower output growth, the lackluster intakes for new jobs and the rise of finished goods inventory. Output sub-index dipped to 49.1 in June from 49.7 in May, staying in contractionary territory for the fourth consecutive month, even if the average reading in the second quarter (49.4) came in slightly better than in the first quarter (48.4).
Employment sub-index edged up to 48.6 in June from a three-year low of 47.8 in May, but this also represented the fourth consecutive sub-50 reading - a pattern last seen during the 2008 global financial crisis.
Due to the rise in finished goods inventories (from 50.9 in May to 52.2 in June), the ratio of new orders minus finished goods inventory reading deteriorated to from -3 in May to -5.3 in June - the worse since the end of 2008.
Weaker demand
Also reflecting the weaker demand, prices suggested deflation rather than inflation risks. Both output and input prices dropped by around 6 points to 41.2 and 40.7 respectively in June, the lowest reading since 2009. The weaker flash reading confirmed the ongoing growth slowdown though the pace of slowdown seems to be slowing (0.9 point drop in May vs. 0.3 point decline in June). External demand remains weak and continues to weigh on China's manufacturing conditions.
Another significant drop of new export orders implies still strong external headwinds to drag China's exports growth in the months ahead. This also underlines our view that the upside surprise in May's exports growth is unlikely to be sustained. Despite the temporary relief from the Greek election results, the European crisis is far from the end. This, plus the recent slower employment and consumer spending growth in the US, suggests a bumpy and slow recovery down the road. Domestic demand didn't see any meaningful improvement in June, as destocking pressures continued to build. The sharp fall of prices (though also reflecting the recent big drop of oil prices) just underlines the weakness of aggregate demand.
Given that the quantity and the stock of purchases remained below 50 in June without any meaningful improvement, the accumulation of finished goods reflected more of weaker new orders rather than the expectation for better future demand. This is likely to continue to weigh on production growth.
It is time to focus on the job market, which is unlikely immune to continuous growth slowdown. Employment tends to be a lagged indicator and the lack of high frequency employment data in China is likely to disguise the actual situation and make policy actions behind the curve. But the recent weaker employment growth suggested by both HSBC and official PMI points to downside risks. This is also confirmed by the central bank's quarterly household survey, which suggest that in second-quarter households expectation for future employment and future income both dropped to the lowest level since financial crisis. This is likely to weigh on consumer consumption, if the downward trend is not reversed.
Decisive stimulus
As inflation is not a concern, we expect policy makers to introduce more decisive policy stimulus to reverse the growth slowdown. We still expect another 200 basis-point reserve requirement ratio cuts for the rest of this year and the next RRR cut is likely to be delivered in the coming weeks (if not days) to smooth liquidity. Meanwhile, apart from the smaller money inflows over the past few months, the central bank bill maturity profile point to a significant drop of maturing bills in July.
In addition, fiscal easing and opening-up more sectors to private investment should also be implemented in full swing to cushion the growth slowdown. It takes a while for these easing measures to filter through.
Growth slowdown continued into June and the downside risks remain. More worrisome, this will inevitably weigh on job market, hence posing risks to consumption growth. With inflation falling fast, we expect more aggressive easing measures to reverse growth slowdown.
Sun Junwei is a China economist at HSBC. Qu Hongbin is co-head of Asian Economics Research at HSBC. The article is based on a HSBC Global Research note dated June 22. The opinions expressed are their own.
The sluggish new business growth translated into slower output growth, the lackluster intakes for new jobs and the rise of finished goods inventory. Output sub-index dipped to 49.1 in June from 49.7 in May, staying in contractionary territory for the fourth consecutive month, even if the average reading in the second quarter (49.4) came in slightly better than in the first quarter (48.4).
Employment sub-index edged up to 48.6 in June from a three-year low of 47.8 in May, but this also represented the fourth consecutive sub-50 reading - a pattern last seen during the 2008 global financial crisis.
Due to the rise in finished goods inventories (from 50.9 in May to 52.2 in June), the ratio of new orders minus finished goods inventory reading deteriorated to from -3 in May to -5.3 in June - the worse since the end of 2008.
Weaker demand
Also reflecting the weaker demand, prices suggested deflation rather than inflation risks. Both output and input prices dropped by around 6 points to 41.2 and 40.7 respectively in June, the lowest reading since 2009. The weaker flash reading confirmed the ongoing growth slowdown though the pace of slowdown seems to be slowing (0.9 point drop in May vs. 0.3 point decline in June). External demand remains weak and continues to weigh on China's manufacturing conditions.
Another significant drop of new export orders implies still strong external headwinds to drag China's exports growth in the months ahead. This also underlines our view that the upside surprise in May's exports growth is unlikely to be sustained. Despite the temporary relief from the Greek election results, the European crisis is far from the end. This, plus the recent slower employment and consumer spending growth in the US, suggests a bumpy and slow recovery down the road. Domestic demand didn't see any meaningful improvement in June, as destocking pressures continued to build. The sharp fall of prices (though also reflecting the recent big drop of oil prices) just underlines the weakness of aggregate demand.
Given that the quantity and the stock of purchases remained below 50 in June without any meaningful improvement, the accumulation of finished goods reflected more of weaker new orders rather than the expectation for better future demand. This is likely to continue to weigh on production growth.
It is time to focus on the job market, which is unlikely immune to continuous growth slowdown. Employment tends to be a lagged indicator and the lack of high frequency employment data in China is likely to disguise the actual situation and make policy actions behind the curve. But the recent weaker employment growth suggested by both HSBC and official PMI points to downside risks. This is also confirmed by the central bank's quarterly household survey, which suggest that in second-quarter households expectation for future employment and future income both dropped to the lowest level since financial crisis. This is likely to weigh on consumer consumption, if the downward trend is not reversed.
Decisive stimulus
As inflation is not a concern, we expect policy makers to introduce more decisive policy stimulus to reverse the growth slowdown. We still expect another 200 basis-point reserve requirement ratio cuts for the rest of this year and the next RRR cut is likely to be delivered in the coming weeks (if not days) to smooth liquidity. Meanwhile, apart from the smaller money inflows over the past few months, the central bank bill maturity profile point to a significant drop of maturing bills in July.
In addition, fiscal easing and opening-up more sectors to private investment should also be implemented in full swing to cushion the growth slowdown. It takes a while for these easing measures to filter through.
Growth slowdown continued into June and the downside risks remain. More worrisome, this will inevitably weigh on job market, hence posing risks to consumption growth. With inflation falling fast, we expect more aggressive easing measures to reverse growth slowdown.
Sun Junwei is a China economist at HSBC. Qu Hongbin is co-head of Asian Economics Research at HSBC. The article is based on a HSBC Global Research note dated June 22. The opinions expressed are their own.
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