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Stop growing too bullish on government stimulus tools
By Lu Ting |
June 8, 2012, Friday
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Print Edition
Print Edition
CHINA'S official Manufacturing Purchasing Managers' Index declined to 50.4 in May from 53.3 in April, disappointing the market by a wide margin. The weak PMI reading can be attributed to two factors, in our view.
First, although we believe that the National Bureau of Statistics has greatly improved its seasonal adjustment, seasonal factors could still be behind the sharp drop.
Note that, in 2009-2011, the official PMI dropped by 1.0 percentage point on average in May. Moreover, the disappointing activity data in April could also have had a negative impact on PMI in May, which reflects sentiment among purchasing managers.
Second, the economy might have continued softening in May after an across-the-board slowdown in April.
We need to wait for more stable and useful data such as industrial production growth, which will be released over this weekend, to determine the pace of the current slowdown. Note that our second-quarter GDP forecast is 7.6 percent year on year, against market consensus of around 7.9 percent.
Pro-growth
Given a slew of disappointing data, the policy stance will likely be more pro-growth.
If the major economic data released tomorrow remain weak, we believe the central government would ramp up investment on social housing and public infrastructure and hasten approval of other investment projects.
However, while some of market participants have begun anticipating a large stimulus package, we believe it's still too early to call for that.
In our view, it's most likely that without the Greek exit, the stimulus package will be of a small scale. If there were to be another global financial crisis, we believe the central government would take a bigger role in borrowing from capital markets.
However, it's too early to speculate on the size of stimulus as it's beyond our capability to quantify the impact of the crisis.
In any case, given all the information in hand, in our view markets should not turn overly bullish on speculation of a big stimulus package, and markets should equally avoid being too bearish on short-term weakness of the domestic economy.
First, although we believe that the National Bureau of Statistics has greatly improved its seasonal adjustment, seasonal factors could still be behind the sharp drop.
Note that, in 2009-2011, the official PMI dropped by 1.0 percentage point on average in May. Moreover, the disappointing activity data in April could also have had a negative impact on PMI in May, which reflects sentiment among purchasing managers.
Second, the economy might have continued softening in May after an across-the-board slowdown in April.
We need to wait for more stable and useful data such as industrial production growth, which will be released over this weekend, to determine the pace of the current slowdown. Note that our second-quarter GDP forecast is 7.6 percent year on year, against market consensus of around 7.9 percent.
Pro-growth
Given a slew of disappointing data, the policy stance will likely be more pro-growth.
If the major economic data released tomorrow remain weak, we believe the central government would ramp up investment on social housing and public infrastructure and hasten approval of other investment projects.
However, while some of market participants have begun anticipating a large stimulus package, we believe it's still too early to call for that.
In our view, it's most likely that without the Greek exit, the stimulus package will be of a small scale. If there were to be another global financial crisis, we believe the central government would take a bigger role in borrowing from capital markets.
However, it's too early to speculate on the size of stimulus as it's beyond our capability to quantify the impact of the crisis.
In any case, given all the information in hand, in our view markets should not turn overly bullish on speculation of a big stimulus package, and markets should equally avoid being too bearish on short-term weakness of the domestic economy.
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