Upbeat Chinese PMI Reflects Feed-Through Of Stimulus, More In 2H14

Chinese economic growth has shown signs of gathering momentum again, thanks to the government’s stimulus measures. Following the better-than-expected 2Q14 GDP growth, the preliminary manufacturing PMI by HSBC/Markit showed a rise to 52, the highest level in 18 months, in July from 50.7 a month ago. This suggested that the impact of the ‘mini-stimulus measures’ implemented earlier in the year filtering through. We expect the government to continue to add more stimuli to the market so as to boost growth for achieving this year’s GDP growth target at around +7.5%.

The manufacturing PMI, a leading indicator of China’s economic activities, has stayed in the expansionary territory in July. Looking into the details, the ‘output’, ‘new orders’ and ‘new export orders’ components all expanded in accelerated rates. The increases in ‘new orders’ (up +1.9 points to 53.7) and the ‘new export orders’ (up +2 points to 52.7, the highest since November 2010) indicated that the external demand environment was strong. Released last week, China’s GDP grew +7.5% y/y in 2Q14, accelerating from +7.4% in the prior quarter. On quarterly basis, growth accelerated to +2% q/q from an upwardly revised +1.5% in 1Q14. Meanwhile, it was also reported that growth in fixed asset investment (FAI) and industrial production (IP) accelerated.

The solid improvements were mainly driven by the government’s fiscal and monetary stimulus. The State Council’s reiterated its ‘neutral’ monetary policy stance and emphasized the focus on reducing the funding cost. The government outlined 10 specific measures to ease financing costs for real economy on Wednesday. It would provide more support to the agricultural sector and SME through re-lending. It would also control the funding costs of financial institutions. It ordered that the wealth management products (WMPs) should be directly invested in real economy. Moreover, the government would call off improper fee charges on borrowers and other clients. On SMEs, it would improve lending to SME, allow private capital to set up mid/small banks to them as well as increase SME bond issuance and size. Meanwhile, the government would improve commercial banks assessment system and weaken the stress on profit growth and asset size expansion, develop government backed guarantee institutions and SME lending related insurance products, and further push interest rate deregulation.

These measures another round of China’s stimuli to bolster this year’s GDP growth to the +7.5% target. Premier Li Keqiang also stated that growth of slightly more or less than +7.5% in 2014 would be acceptable as long as it was accompanied by job creation and higher wages. We believed that the measures would be positive to near-term GDP growth.

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