China: Economic dynamics are changing - BBH

In view of analysts at BBH, Chinese dynamics are changing as the strength of the economy continues to defy expectations, and the yuan’s appreciation is one of the many surprises this year.  

Key Quotes

“Before a week-long holiday at the start of October, China again surprised the market.  Many economists expect China’s economy to slow in H2 this year, but China reported its manufacturing PMI rose to 52.4 in September, a five-year high.  The median forecast was for a 51.5 reading.  The Caixin measure, which weighs small business activity more, slipped to 51.0 from 51.6.  The non-manufacturing PMI rose to 55.4 from 53.4 in August.  The construction sector was particularly strong, while the services activity also broadly increased.”

“Separately, the PBOC announced that the required reserve ratio will be cut by between 50 and 100 bp at the start of next year for banks that lend to small businesses.  Required reserves vary considerably in China.  Across deposits at large banks, required reserves are 17%, which is among the highest in the world.  The selective reduction that was announced is probably best understood not as an easing of monetary policy or providing more fuel for the credit bubble.  Rather, like other policies recently introduced, it is to ensure the transmission mechanism reaches small and medium businesses.”