Weaker-Than-Expected PMI Points To More Easing Measures

A weaker-than-expected reading of China’s official Purchasing Managers Index (PMI) suggests that the easing bias in the country’s monetary policy will be maintained, says a report issued by the Australia and New Zealand Banking Group Limited (ANZ).

China’s official PMI, the bellwether of large industrial firms, declined to 50.8 in October, compared with 51.1 in September.

In the meantime, the HSBC PMI, representing a group of private-sector and small and medium enterprises, only edged up by 0.2 percentage point to 50.4 in October.

The decline of the official PMI was across the board. The output sub-index dropped by 0.5 percentage points to 53.1. The new order and new export orders sub-index fell by 0.6 percentage points and 0.3 percentage points respectively, indicating that the industrial production is likely to remain soft in October.

Meanwhile, input price sub-index eased significantly, dropping by 2.3 percentage points, suggesting that the PPI inflation could breach below -2% in October.

As a result, it is reported that China’s central bank conducted at least RMB200 billion Standing Lending Facility (SLF) towards the medium-sized banks in mid-October, in order to lower the cost of funds for the real economy.

In the meantime, the railway projects have accelerated since the third quarter, and the government plans to increase the whole year railway investment by at least 20%.

The electricity generation rebounded slightly in early October, suggesting that the manufacturing sector is still under pressure. Notably, some industries, especially those related to property market, are still struggling to reduce production capacity.

For example, the crude steel output still remained lukewarm in early October, suggesting that the Chinese authorities are reluctant to launch a broad-based stimulus.

From this perspective, China’s central bank will likely continue the operations of SLF to maintain an overall relaxed liquidity condition.

As the effect of the SLF is very similar to a bank reserve requirement ratio (RRR) cut, the likelihood of RRR cuts is declining before the end of this year, says the report.

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