Repeat: China Offl PMI Seen Resilient Despite Weak HSBC

Repeat: China Offl PMI Seen Resilient Despite Weak HSBC

BEIJING (MNI) - A sub-50 reading for a China flash purchasing managers index released Thursday doesn't mean the government's index due for release on August 1 will also suggest that Chinese industry is in contraction.

While it wasn't a vote of confidence for the health of the Chinese economy, analysts said the weakness seen in the HSBC flash PMI today probably won't be reflected in the PMI that is issued by the China Federation of Logistics and Purchasing.

Risk currencies and equities sold off immediately after HSBC said its flash purchasing managers index for July fell to a 28-month low of 48.9 and points to a reading under 50 when the UK-based bank reports the final reading on August 1.

The official PMI, a collaboration between CFLP and the National Bureau of Statistics, dropped to 50.9 in June from 52.0. Its last sub-50 reading was in February 2009 and fell to as low as 38.8 in November 2008, at the height of the global financial crisis.

Markets would likely react negatively again on August 1 if CFLP announces the first reading below 50 in 28 months (the PMI is released at 0900 Beijing-time 0100 GMT.)

But analysts said that's unlikely to happen, arguing that the official PMI tends to survey larger state-owned firms, which are in better health than their smaller, often-privately held, peers captured by Markit, which compiles the PMI for HSBC.

"We don't believe that the official PMI would fall below 50 in July," said Ken Peng, a Beijing-based economist with BNP Paribas.

Even HSBC urged caution and dismissed concerns about a hard landing. Economist Qu Hongbin acknowledged that 70% of the HSBC survey panel comprises small and medium-sized firms and argued that the reading below 50 still points to industrial output growth of around 13%.

"Don't panic. Despite the slowing of manufacturing activity, resilient consumer spending and continued investment in thousands of infrastructure projects will continue to support GDP growth rate of almost 9% for the rest of this year," he told clients in a note.

At the same time that HSBC was releasing its survey, Ministry of Industry and Information Technology spokesman Zhu Hongren was telling reporters that industrial output will grow by 13% to 15% in the second half of this year, compared with 14.3% in the first six months.

He acknowledged that small enterprises faced "outstanding difficulties" owing to financing problems, but denied there were waves of closures in southern China.

Today's data revived concerns about a hard economic landing in China, just a week after the government said the economy grew by a stronger-than-expected 9.5% y/y in the second quarter, powered by 15.1% jump in industrial output in June.

Both HSBC's Qu and BNP's Peng said the June data reflected easing electricity supply after the government allowed tariffs to rise. Peng said slightly easier credit conditions and better trade numbers also helped quarterly growth.

"Both the power and the trade boost should fade in coming months and that could tighten business environment further," he said, arguing that data support selective policy easing.

Despite the industry ministry's bullish outlook, pressure is mounting on the central government to further relax at least some of the slew of measures it has introduced since October to battle inflation.

Today's PMI reading may reflect seasonality -- Societe Generale's Wei Yao noted that the PMI last July also fell below 50 -- but it is also evidence of the pain being felt in more vulnerable parts of the economy as liquidity dries up and financing becomes increasingly hard to come by.

The credit availability index in the Market News International China Business Sentiment Survey fell to 33.33 in June, the third lowest on record (the China Business Sentiment Flash Survey is scheduled for release at 0935 Beijing time, 0135 GMT on July 22 and the final survey on July 29.)

Analysts said that Beijing could be forced to respond if the CFLP reports a lower-than-expected reading on August 1.

"No doubt, the growth momentum continues to soften. We expect the official PMI to come in at 50," said SG's Yao. "If official PMI comes in below 50, PBOC will probably be very cautious in tightening further."

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