The recent release of the official Manufacturing Purchasing Managers’ Index (PMI) in Mainland China showed that sentiment among frontline managers has been improving. Broadly recognised as one of the most symptomatic leading indicators to gauge the performance of the Chinese economy, this result confirms our view that we should see stable growth in 2017.
Continued improvement across the board
Reaching 51.8 in March, the PMI reached the highest level since April 2012 (see Chart 1). Looking into key sub-indices, the more optimistic sentiment shared by purchasing managers was supported by an improving domestic demand. The production sub-index and the new order sub-index registered 54.2 and 53.6 respectively, reaching new highs since July 2014 and indicating that production activities were becoming more upbeat.
At the same time, external demand also seemed to have turned the corner, as the new export order sub-index recorded 51.0 in March, reaching the highest level since April 2012. This is in line with the recent rebound of international trade activities (see Chart 2). Together with the purchases sub-index (see Chart 1) that reached 53.4, the highest level since November 2013, the aforementioned PMI sub-indices signal that growth should remain intact.
Perhaps, more importantly, the broad-based stabilisation is lifting the employment situation, which is a key area that policymakers are concerned about. For the first time since May 2012, the employment sub-index of PMI has reached the 50-threshold (50.0), showing that employment in the manufacturing sector was no longer shrinking. [1] Although we have not yet identified any high-frequency official data to track sectoral employment trends, such sentiment should ameliorate the pressure on overall unemployment, which had been picking up in recent years (see Chart 3).
Conclusion
With the PMI readings showing continued improvement, economic growth in the Mainland should gather further momentum and general worries about the economy will likely subside in the near term. On the other hand, such readings suggest that there is room for policymakers to slowly tighten the very loose monetary conditions (see Economic Update on 1 March).
As it is generally accepted that any rapid reversal of policy measures will hinder the stabilising economic trends, overzealous monetary initiatives should be avoided given that inflationary pressure has remained contained. Nevertheless, the cost of financing could still bounce back and potentially lead to inadequate access to financial resources for SMEs. Developments in these areas should be watched out for in the latter part of this year.
[1]A PMI reading of higher than 50 represents expansion, and vice versa. Areading at 50 indicates no change.
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