China: PMI to head lower, no hard landing - Danske Bank

Analysts from Danske Bank, explained that the official Chinese NBS manufacturing PMI for September was very strong rising to the highest level since 2012 whereas the private Caixin PMI manufacturing fell back. They expect the PMI to head lower but not a hard landing. 

Key Quotes: 

“Caixin PMI more credible: Normally the two indices move in line but this month there was unusually big divergence. We have a bit more faith in the Caixin index this month as it fits better with what we’ve seen in commodity markets. As chart 4 and 5 shows PMI is quite correlated with commodities and the decline we’ve seen in metal prices in September (not least in iron ore) clearly points to somewhat slower activity. One could have a suspicion that the companies when answering the official PMI survey have painted a bit more positive picture than what is the real picture, because of the Congress in the Communist Party coming up this month.

 “We expect PMI to head lower in the coming quarters due to several reasons: 1) Steel production seems to have been boosted in the past months ahead of the new curbs on production that is implemented over the winter due to pollution issues. Hence the ramp up in production will likely be replaced by a big decline over the winter. 2) The housing market has already started to slow due to tighter conditions for home purchases. We expect this to increasingly feed into slower construction activity over the next year.”

 “While we expect a slowdown and Caixin PMI manufacturing falling below 50 in coming quarters (was 51.0 in September). However, we don’t look for a hard landing because 1) housing inventories are generally low putting a floor under how much construction growth should slow and b) we expect export growth to stay robust due to the ongoing recovery in the euro area and the US.”