ChinaNov PMI beats estimates
Yesterday morning, China’s official manufacturing Purchasing Managers’ Index (PMI) came in at 51.4 for November, matching the 18-month high reached in October. The median projection in a Bloomberg News survey was for 51.1, with levels above 50 signaling expansion. A separate gauge from HSBC Holdings Plc and Markit Economics was 50.8, topping estimates. (Bloomberg)
 
MER says to be cautious in interpreting the stronger-than-expected number
To this, Macquarie Equities Research (MER) issued a report on the same day, expressing that the headline number in November is somewhat misleading, as the main reason it held up was a pick-up of “Employment” sub-index (to 49.6 from 49.2), which is of lower importance and data quality compared with other sub-indices in the PMI.
 
“New orders” fell for the second month in a row
The most important sub-index in PMI, “New orders”, marks the second straight month of falling (to 52.3 from 52.5), after it grew for three months in a row from July to Sep. Overall, MER believes November industrial production figures to be released on 10 December will confirm that the latest recovery peaked in Oct. Specifically, Industrial Production (IP) in Nov could drop to 10.0% yoy from 10.3% in Oct. 4Q13 GDP growth could fall to 7.6% yoy from 7.8% in 3Q13.
 
Restocking is close to running its course
“Finished goods inventory” jumped from 45.6 in Oct from 47.9 in Nov, the highest reading since June, suggesting the room for further restocking might be quite limited. The recovery since July, like each recovery in the past three years, was largely driven by infrastructure investment and inventory restocking. At the moment, both of the growth drivers seem to be softening, as infrastructure fixed asset investment growth slumped in Sep and Oct. Indeed, “Input prices” sub-index in Nov PMI also fell for the second month in a row (to 52.5 from 53.3), boding ill for the strength of domestic demand.
 
External demand strengthening in Nov
In Nov, “New export orders” rose to 50.6 from 50.4, while “New orders” fell to 52.3 from 52.5 in Oct. It suggests while domestic demand is weakening, external demand seems to be strengthening on the improved outlook in developed markets. Indeed, other indicators such as OECD leading indicators and Korea’s export in Nov also imply a steady recovery for China’s export growth. In the next three to six months, however, MER does not expect the improvement in export growth could offset the slowdown in domestic demand. But MER believes the single most important upside risk to their 7.5% GDP forecast for 2014 is a stronger-than-expected recovery in the advanced economies (our baseline is 10% export growth for China in 2014 vs. 7% in 2013).
 
Market focus to shift to growth and regulation
After the reform honeymoon in November, in Dec, the focus of the market will shift to: (1) the sustainability of the latest recovery and the following themes:
- China’s Nov data pack, which will be released on 10 December,
- Central Work Economic Conference (held in Dec 15-16 last year), where MER expects the Chinese government to lower its official growth target from 7.5% to 7.0%.
-Possible regulation on inter-bank assets. According to Caijing magazine, the China Banking Regulatory Commission (CBRC) might soon roll out restrictions on Chinese banks’ interbank exposures.
- New local government debt audit report. We expect the result will likely be around RMB15tn, up from RMB10.7tn as at end-2010 reported in the last audit. Given  urrent market estimates ranging from RMB15tn to RMB25tn, the result should help allay market concerns on local government debt issues.
- Property curbs in more Chinese cities. Residential property prices surged 14.7% YoY and 10.0% YoY in the top 10 and top 100 cities during the first ten months of 2013, according to Soufun. Since 23 Oct, 15 cities have launched new property curbs. More cities could join the club in coming weeks.

Source: Macquarie Research - 3 Dec 2013