The performance came after China announced on 1 August 2014 manufacturing PMI figures which showed that the country’s manufacturing expanded in July at the fastest pace in more than two years. This could signal a pickup in economic growth. On the same day, Macquarie Equities Research (MER) released a research report and some excerpts can be found below…
 

The official manufacturing PMI in July came in quite strong, rising to 51.7 from 51.0 in June (consensus: 51.4), the highest level since April 2012. This is consistent with the HSBC manufacturing PMI, which rose to an 18-month high of 51.7 in July from 50.7 in June. The encouraging PMI reading is mainly driven by improved external demand and stimulus policy, as evidenced by robust readings of New Export Orders/Production sub-indices. It is also helped by improved corporate confidence as the pro-growth policy stance largely removes the downside risk for the Chinese economy this year.
 

Improved confidence is the key in driving higher PMI: Back in 1Q14, sentiment in capital market and corporate sector was significantly impaired, due to the fear of a hard landing caused by property down-cycle and credit risks. But it is pretty clear now that policymakers will do whatever they can to deliver this year’s growth target of “around” 7.5%, largely for maintaining a stable economic backdrop amid the ongoing anti-corruption campaign. As such, sentiment has improved significantly in the past few months, which partly explains the inconsistency between stronger PMI readings and lacklustre demand in the real economy.
 

Limited near-term downside/upside risks for economic growth: In 2H14, the economy is still facing some downside risks due to the drag from the property sector. Moreover, inventory level in the whole industrial sector is also relatively high. As such, MER expects policy to remain supportive in 2H14 and the tug of war between soft fundamentals and policy support would continue. In terms of growth, MER believes that both upside and downside risks are limited in 2H14, with the growth rate likely to be in a narrow range of 7.2%-7.5%.
 

Stimulus measures to be “targeted”: With regard to policy, instead of broad required rate of return (RRR)/rate cut, MER believes that stimulus policy would be conducted in a more “targeted” way, such as relending facility by the People’s Bank of China, Pledged Supplementary Lending, targeted RRR/rate cuts for certain segments in the economy (social housing, first-time home buyer, urban infrastructure, SMEs, etc.).
 

Targeted easing for SMEs take effect: The PMI for small enterprises rebounded by 1.7ppt to 50.1 in July, the highest level since March 2012. This probably reflects the government’s efforts in improving business environment and supporting SME financing. Meanwhile, PMI for large enterprise rose further to 52.6 in July from 51.5 in June.

Source: Macquarie Research - 4 Aug 2014