Canaccord Genuity Morning Coffee on China PMI: Still Idling...More Stimulus Needed

July 3, 2012 10:47 AM EDT
Canaccord Genuity Morning Coffee on China PMI: Still idling...more stimulus needed to jumpstart

The headline PMI for June fell 0.2 pp to 50.2, while it still above the 50 mark it remains weak, in Credit Suisse Chief Economist for Non-Japan Asia Dong Tao’s view. This is the weakest headline PMI reading since November 2011, consistent with his observation that the underlying momentum of the economy remains weak. The new orders index fell again by 0.6 pp to 49.2, remaining in the sub-50 territory. Some specific areas, such as transport equipment and electrical machinery improved, echoing the new funding from the central government to local infrastructure projects, but they failed to trigger a broad-based investment rebound. Dong believes that the stimuli launched in the middle of May seems to have failed to jump-start the overall economy, yet the moderation in PMI is not severe enough to justify a much more aggressive rescue package. Stripping out the direct benefits from Beijing’s stimuli, Dong thinks the economy is still moving downwards. He cautions that given that most of the funding has been one-off in nature from the central government or a bank loan, if the package cannot lift growth in June and July, it probably won’t. Still, the headline PMI remains in expansionary territory, hence he does not anticipate another major stimuli on the horizon. Dong believes housing policy is probably a more effective policy measure than monetary or fiscal policy. He does not expect Beijing to remove the harsh headline statement against speculation in the property sector, but he does expect it to be less restrictive on local government measures to help the local markets.

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