China: Steady PMI overshadows weaker PPI - ANZ

Betty Rui Wang, Senior China Economist at ANZ, explains that China’s manufacturing PMI held up well in May, overshadowing the decline in the producer price index.

Key Quotes

“Both the purchasing price and producer price indices within the PMI survey continued to trend lower: the purchasing price index fell to 49.5 in May from 51.8 prior, while the producer price index retreated to 47.6 in May from 48.7 in April. We maintain our view that the producer price index may have peaked in February and will extend its downtrend in the coming months. This indicates the possibility of weaker growth momentum in Q2 compared with Q1.”

“The rebound in non-manufacturing PMI may not be sustained and we see some downside risks in the near future. The rebound was mainly supported by commercial services. But we think deteriorating sentiment in the financial sector amid regulatory tightening may weigh on overall sentiment in the nonfinancial sector in the near future. Construction activity remained solid in May, however, with the index hovering above 60.”

“We expect infrastructure investment to take a big role in supporting growth in the coming months. Infrastructure investment appears to have decoupled from the current financial deleveraging in our view. This, together with the jump in the steel sector PMI (May: 54.8 vs April: 49.1), may indicate a solid outlook for fixed asset investment (FAI), with May’s data due on 14 June. Robust FAI will provide some support to growth momentum in Q2, and we expect Q2 GDP to reach 6.6% y/y, higher than the official 6.5% growth target.”