Weakness on Chinese manufacturing sector continues

The Chinese flash PMI (HSBC/Markit) fell for a second consecutive month in June reaching its lowest level since November 2011. Manufacturing confidence thus continued to fluctuate around the levels of the past six months, with no notable turn for better or for worse. We expect the manufacturing PMI to remain at depressed levels over the summer months. The “official” PMI, released by the NBS, continues to point towards stronger activity on the manufacturing sector, although after the sharp correction in May the difference has shrunk. The NBS PMI will be released on July 1.

Although the new orders index is more a coinciding than a leading indicator, the decline in both new orders and production is not an encouraging sign. June saw an especially steep plunge in export orders, raising worries of weak global demand. Thus the HSBC/Markit PMI continues to point towards a fragile manufacturing sector and economy as a whole in Q2. Growth in industrial production has been very weak in recent months (9.6% y/y in May). We expect growth to slow to 7.6% y/y in Q2, with growth momentum building up again in the second half of the year. The weakness on the manufacturing sector supports our expectations of continued monetary and fiscal policy easing.

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