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PBOC Governor Tries to Reassure Markets

Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), promised Friday to ensure there is enough money in financial markets to maintain stability after a credit crunch sparked fears of a possible crisis, his first comments since a record cash squeeze hit the world’s second-largest economy.


Addressing a financial forum in Shanghai, Zhou said:


“The PBoC will use all sorts of instruments and measures to adjust the overall liquidity level, so as to ensure the overall stability of the market.”


More from Bloomberg:


China’s growth slowdown remains in a “reasonable” range and the economy is stable, Zhou, head of the People’s Bank of China, said today in a speech at the annual Lujiazui Forum financial conference in Shanghai.
Zhou is trying to soothe concerns that the credit crunch will harm growth, saying today that he’s fully confident in the nation’s economic prospects and financial system. He reiterated points in the central bank’s June 25 statement that it will use tools to safeguard stability in money markets, after the overnight repurchase rate surged to a record high last week.
The PBOC “will use all kinds of tools to appropriately adjust liquidity in the market and maintain the overall stability of the market,” Zhou said in his first public remarks since the liquidity squeeze that sent money-market rates to the highest in at least 10 years.
The central bank will “create good monetary conditions for stable operation of financial markets and economic development,” Zhou said. Markets are “very sensitive” and will have a “fast response to any signals,” he said.
He made the points on the economy and markets at the end of a 30-minute speech devoted mostly to discussing how Shanghai can develop into a global financial center.


Private Data Confirmed that Chinese Manufacturing Activity Contracted in May

According to the final release of HSBC & Markit, Chinese manufacturing activity contracted in May to 49.2 down from 50.4 in April and down from the first May estimate of the 49.4. This survey indicates the first deterioration in manufacturing activity in seven months and confirms that Chinese growth has slowed in Q2.


The statement noted:


“After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 49.2 in May, down
from 50.4 in April. This signalled the first deterioration in operating conditions in seven months, albeit at only a marginal pace.”


The Chief Economist, China & Co-Head of Asian Economic Research at HSBC also said:


“The downward revision of the final HSBC ChinaManufacturing PMI suggests a marginal weakening of manufacturing activities towards the end of May, thanks to deteriorating domestic demand conditions. With persisting external headwinds, Beijing needs to boost domestic demand to avoid a further deceleration of manufacturing output growth and its negative impact on the labour market. The new leaders should strike a delicate balance between reform and growth.”


This figure is totally opposed to the official data. The HSBC  marked the lowest reading since October 2012 while official data suggest a higher expansion in May.
Analysts have in part attributed the divergence to a two-tier performance, where the large state-owned firms outpace the squeezed-out smaller institutions surveyed by the HSBC. Others continued to question the accuracy of China’s official economic data, deferring to industry indicators such as power consumption and bank lending on tap to be released next week.

Chinese Official Manufacturing PMI Rebounded in May, Beating Expectations

Official Chinese manufacturing PMI climbed to 50.8 (up from 50.6 in April) beating expectations for a fall to 50.0 (or even lower). May was the eight consecutive month that the official PMI was above 50, a level that indicates expansion in the manufacturing sector. A reading below 50 indicates contraction.
This rebound is mainly due to the “Output” component which increased to 53.3 in May against 52.6 the previous month. At the opposite, “Employment” was the only component down from April at 48.8.
Here is the table from the National Bureau of Statistics of China:


April May
PMI 50.6 50.8
New Orders 51.7 51.8
New Export Orders 48.6 49.4
Output 52.6 53.3
Inventory of Finished Goods 47.7 48.6
Inventory of Raw Materials 47.5 47.6
Employment 49.0 48.8
Input Prices 40.1 45.1

My view:
1/ The official data contrasted with the preliminary reading of manufacturing PMI released by HSBC which showed that Chinese manufacturing activity contracted for the first time in seven months in the first few weeks of May. This distorsion can by explained by three factors:

a/ The HSBC survey focuses more on small and medium-sized firms in the private sector as compared with the official one. Generally, these companies have less access to credit and more difficulties to export.

b/ The seasonal adjustment method used by NBSC is different.

c/ Official data tend to overestimate the real pace of growth.


2/ The two surveys showed that Input Prices are decreasing at a slower rate in May suggesting that inflationary pressures could come back in the coming months.
3/ Chinese authorities are facing a dilema with on the one hand, a rise of M2 (16.1% YoY in April well above the official target of 14%) and housing prices (4.9% YoY in April), a slower decrease of Input Prices and on the other hand, a slowdown in GDP associated with an increase of unemployment.


Note that a fuller view of the manufacturing activity should appear on Monday with the final release of HSBC survey.

Chinese Growth Continued to Slow in May

Since the beginning of the year, Chinese data, both private and public, have showed that growth is slowing in a context where Chinese government and PBOC opted for a more efficient growth.


Authorities want to refocus the activity from exports towards domestic consumption. Therefore, they try to improve households’ living standards by increasing the urbanization rate (more infrastructure investments) and to support housing affordability and purchasing power (lower inflation).


Currently, the problem is that property prices are increasing sharply as new home prices rose 4.9% YoY in April 2013 (biggest increase since Apr 2011). As a consequence, officials started to implement measures to curb prices which will penalize construction’s activity.


In the mean time, money supply (M2) accelerated in April reaching the highest level since March 2011 at 16.10%. This figure is well above the official target (14%) and could result in inflation in the coming months. It explains why PBOC has adopted  a less accommodative stance. Therefore, lowering interest rates or RRR seem to be excluded in the short term.


In these conditions, the activity keeps on slowing in May as the preliminary reading of  Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics was 49.6 down from 50.4 in April. It shows that China’s manufacturing is contracting for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter.


According to Bloomberg data, this negative signal is confirmed by imported iron ore price which has declined significantly since mid-February 2013 and reached today its lowest level since October 2012.



Investors and economists will look closely at the official manufacturing PMI which will be published on Saturday. According to our analysis, it is likely that this figure will be below consensus (50) and will confirm the contraction in manufacturing sector. Let we see…