Analyzing the Beat in China’s PMIs

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Many traders got to their desks at the start of the week with a pleasant surprise from Chinese data. Not only did the PMIs beat expectations, but they popped back up into expansion territory.

This means they successfully ended a three-month period of contraction. Although, as we pointed out last week, some analysts were expecting a more upbeat result. What does this mean? Well…

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Official Vs. Private

Over the last couple of days, we had the release of the official NBS manufacturing PMI as well as the private Caixin survey. The main difference between them is that the official survey encompasses a larger number of companies, with a preponderance of state-run enterprises. Meanwhile, the private survey tracks smaller businesses. Traditionally, the NBS survey paints a rosier picture than the private survey.

This time around, however, the Caixin survey came in above the official survey. Interestingly for forex implications and global growth, the official survey showed that while exports had increased, they still remained in contraction. On the other hand, the private survey showed export orders rising into expansion territory.

Where both surveys coincided was with business conditions. The NBS survey showed that managers felt business conditions were the best in seven months. On the other hand, the private survey showed that it was at a ten-month high.

Drivers of Optimism

A large number of analysts have coincided that this sudden turn to the positive in sentiment is attributable to the Chinese government’s extensive support policies finally taking effect. However, this does not account for the difference of why smaller, private businesses registered the most positive outcome. Especially when the government directed its support efforts at large businesses (which in China are majority-owned by the state).

During the Lunar New Year, there is a substantial increase in consumer spending. This would benefit smaller businesses. And given that exports haven’t returned to growth in both surveys, it would seem the positive outlook is driven by domestic demand.

March was billed as a return to normal following the week-long holiday in February. Despite this, managers might still be spending more during the month to restock after an exceptionally good sales period. If that were the case, it would imply this jump in PMIs are a one-off, and the trend would return.

On the other hand, the idea that government stimulus is the driver for better conditions ignores the general positive attitude coming from trade discussions. (These, of course, intend to lift the tit-for-tat tariffs between China and the US.) Chinese firms might be increasing production in order to meet the expected demand for a resolution of the trade dispute. And smaller businesses are more agile in dealing with the current trade situation.

Finally, there is the issue of inventories. These continued to shrink for the second consecutive month, while input prices have been rising. If businesses were replenishing stock as previously commented, then inventories would have risen.

It’s Not Just China

China’s two largest customers are the US and the euro area, which also reported PMIs. The major economies in Europe continued to slip further into contraction. Germany’s results, in particular, disappointed. Meanwhile, the US continued further into expansion territory even above the market expectations which were already projecting an increase. It’s possible that even despite trade difficulties, the US performance might be dragging the Chinese outlook higher.

Overnight we had PBOC adviser Songcheng confirming reports that regulators are considering a further RRR cut. However, this will only be after the release of the Q1 date.

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