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Chinese PMIs and Potential Signs of Recover

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Overnight, reports surfaced that the Chinese government was “backing away” from its growth target for this year. The media pointed to a recent Communist Party planning meeting in which the target wasn’t mentioned. Remember that the NPC earlier set the growth target at 5.5%, one of the lowest in decades. This also comes after disappointing Q2 preliminary GDP figures.

But the question is whether a downgraded outlook simply is taking into account the effects of what has already happened, or there is worry of another downturn. Covid cases have been rising around the world, with Japan recording a record number of new cases.

Broader implications

Most economies have assumed covid will continue in the background, while China insists on a zero-covid policy. Given the difficulties in predicting how the Chinese government might react to case numbers, it makes it harder to predict how the economy will develop. And investors are loath to commit money when they don’t know whether there will be rolling lockdowns in the near future.

For countries that supply China, the situation is concerning. But, despite factory shutdowns, Chinese imports of raw materials have remained consistent. Inventories have actually fallen, suggesting demand for commodities could remain stable for the remainder of the year. Consumer demand, however, has been suffering, and could contribute to an export disconnect between Australia and New Zealand. Meanwhile, Japanese exporters benefit from lower yen.

Turning to the data

PMIs have returned to expansion territory following the lifting of lockdowns. As a leading indicator, it could be a sign that the economic situation is improving. This is a crucial time for Chinese manufacturers as they work to meet higher demand expected ahead of the holiday season. The consensus among analysts is that Chinese firms will report improving optimism this month.

A minor difference between the official (NBS) and private (Caixin) survey is expected. This could be explained by the official measure covering mostly larger, state-run companies which are less exposed to the housing market. Caixin covers smaller businesses that are more export oriented and could reflect general concern for slowing global economic growth.

What to look out for

Official NBS Manufacturing PMI is forecast to improve slightly to 50.4 from 50.2 in June. Though it is so close to the mid-level that a miss of just a few decimals could put it back into contraction and worry the market. NBS Non-Manufacturing PMI is forecast to improve further to 55.6 from 54.7 prior.

Private Caixin Manufacturing PMI comes out on Monday and is expected to slip a couple decimal points to 51.5 from 51.7 prior. That implies staying solidly in expansion. Caixin Services PMI comes out on Wednesday and is forecast to also expand to 55.2 from 54.5 prior.

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