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China PMI and Risk Appetite Continuation

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Tomorrow we get the release of PMIs from major economies around the world. With preliminary figures already reported last week for Europe, US and the UK, focus is likely to be more on China. PMIs provide an advanced look at how the economy is going. This time around, they could be especially important in the case of China.

The reason that Chinese figures could be extra important is because this corresponds to the first month of full post-covid opening that didn’t include a major holiday. The expectation is that these results could set the tone for the Chinese economy – and by extension, many of the commodity currencies – for the rest of the quarter.

What we are looking for

Focus is likely to be around China’s domestic economy. It’s been battered by the effects of covid lockdowns and a deteriorating real estate sector. The latter is important for commodity currencies, as the building industry is the largest consumer of raw materials. The Chinese government has been on an extensive monetary easing program, spending considerably to prop up the domestic market.

The rest of the world is fighting with rising inflation, leading to increasingly tighter monetary policy. That is expected to weigh on economic growth. But China is in the opposite situation, and could be the key to the global economy avoiding a recession. However, that’s contingent on Chinese people and firms maintaining economic activity, which can be measured in PMIs.

The key difference

There could be more attention on the difference between the Caixin and the NBS measurement, consequently. The private Caixin measure tracks a larger range of smaller businesses, while the firms tracked by NBS would likely better reflect the impact of government measures to prop up the economy.

If NBS outperforms Caixin, it will be in the context of supporting further economic support actions from the PBOC and government. The easing could prompt further weakening in the yuan, aiding Chinese exporters but also helping reduce global inflation. If imported goods cost less or don’t increase in price as much, that would translate into less inflationary pressure among China’s export destinations. On the other hand, countries that export a lot to China, including The Netherlands, Germany and Japan, might face further economic headwinds.

The data in focus

Chinese NBS Manufacturing PMI is forecast to advance further in expansion to 50.8 from 50.1 prior. The non-manufacturing PMI is expected to solidify in expansion, rising to 55.0 from 54.4 prior.

Meanwhile the private Caixin Manufacturing PMI is expected to advance even more, but from a lower starting point. It’s forecast to return to expansion at 50.3 compared to 49.2 prior. The Caixin Services PMI won’t come out until Friday, when it’s expected to show more modest growth to 53.8 compared to 52.9 prior.

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