China - August PMIs show economy stuck in low gear

China Macro: Divergence between both manufacturing PMIs back again

Over the past few days, China’s purchasing managers’ indices (PMIs) for August have been published. To start with the manufacturing side, one of the striking outcomes was the reappearance of the divergence between the two indices: the “official” manufacturing PMI published by NBS and Caixin’s equivalent. The official version fell a bit deeper into contraction territory, to an eight-month low of 49.1 (July: 49.4, consensus: 49.5). By contrast, Caixin’s manufacturing PMI came in stronger than expected and moved back into expansion territory, picking up by 0.6 points to 50.4 (July: 49.8, consensus: 50.0). The difference between these two indices had reached a high of 2.3 points in June (Caixin 51.8 versus NBS 49.5), but dropped sharply in July when Caixin’s index suddenly fell by two full points.

We already commented earlier on this divergence (see here), and noted that the outperformance of Caixin’s index (with a stronger focus on export oriented firms) was a bit symbolic for the current state of the Chinese economy: weak domestic demand and excess supply available for exports. That said, external headwinds are building, as the US economy is slowing and China’s overcapacity is contributing to a broadening of trade spats, particularly in strategic sectors such as EVs and other sectors related to the energy transition (also see our recent China Monthly update, A tale of Trump risks, tariffs, and trade diversion). Perhaps illustrative for this: the export order components are back below the neutral mark in both manufacturing surveys.

Composite PMIs at low levels; more support expected

On the services side, Caixin’s services PMI published this morning dropped a bit more than expected, to 51.6 (July: 52.1, consensus: 51.8). By contrast, the official non-manufacturing PMI published earlier this week picked up marginally, to 50.3 (July: 50.2, consensus: 50.1), the first (slight) improvement shown since last March. The official composite PMI (a weighted average of the output components in the manufacturing and non-manufacturing surveys) dropped marginally to a 20 month low of 50.1 (July: 50.2). Caixin’s composite PMI was stable at a 10 month low of 51.2. Hence, both composite PMIs show that China’s economy remains stuck in low gear, with the property downturn driving down domestic demand and risks on the external front rising. With demand weak, inflation low, and the Fed expected to start cutting from September, we expect further RRR cuts and (mini) policy rate cuts going forward, as well as more targeted support to help mitigate the fall-out from the property sector and to stabilise domestic demand. Allegedly, Beijing is considering asking commercial banks to implement a largescale mortgage refinancing operation, to lower mortgage rates for homeowners and support consumption.