China’s September official manufacturing PMI was much softer, at 50.8, compared to 51.3 in August. The Caixin PMI went one step further, signaling no expansion for the first time in fifteen months.
The official manufacturing PMI was depressed by new export orders and employment, even as output and domestic orders remained positive. Input prices continued to climb, which may weigh on profit margins. The official measure also continues to be dragged by small and medium enterprises.
We look to the services sectors to cushion any significant slowdown in GDP growth for the rest of 2018. Non-manufacturing PMI rebounded to 54.9 after an August print of 54.2. Overall, we expect GDP growth at 6.5% y/y in Q3, marginally down from 6.7% in Q2.
China’s central bank has signaled that it will step up its policy fine-tuning. We expect only slight changes, such as a cut in the reserve requirement ratio again by end-2018.
We expect a mixed picture for September data. Industrial production growth is likely to slow to 5.7% y/y compared to 6.1% prior. We forecast retail sales growth at 9% y/y, unchanged from August.
We are cautiously expecting 10.8% y/y export growth despite favorable base effects. Meanwhile, we forecast import growth of 14.5% y/y, meaning that the trade surplus will narrow to $24 billion from $27.9 billion.
We forecast relatively stable CPI and PPI numbers, at 2.3% y/y and 4.8% respectively. New yuan loans should remain accommodative, at CNY1300 billion.
Figure 1: Manufacturing and Non-Manufacturing Divergence
Source: Bloomberg, Continuum Economics