Stocks in China and Hong Kong reversed early losses as soon as the HSBC flash manufacturing PMI figure was released at 9.45AM yesterday.

The figure had unexpectedly risen in September to 50.5 from 50.2 in August, and beat the consensus of 50.0. The PMI rebound is mainly driven by exports as well as a modest recovery after the sharp fall in August. It is in line with Macquarie Equities Research’s (MER) view that August will be the trough for the third quarter, while China’s third quarter will be the trough for the whole year.

That said, the Chinese underlying economy remains very weak and MER expects mini-stimulus to continue in the coming weeks…

Further excerpts from the MER report published on 23 September are shown below.
 
External demand is the bright spot: The largest improvement came from new export orders, which surged to 53.9 in September from 51.9 previously, the highest level since January 2011. Raw materials inventory also rose to 48.9 after posting a sharp 2.9% decline to 48.1 in Aug. However, exports tend to be volatile and restocking seems unsustainable given falling commodity prices.
Moreover, flash PMI is volatile too: recall it was revised down by 1% last September when the final reading was released. Therefore, MER believes today’s reading will have little impact on policy stance. Even for today’s PMI reading, the employment sub-index fell to the lowest point since Jan 2009. As such, policy will remain supportive although high-profile stimulus such as rate cuts does not seem very likely.
 
Mini-stimulus to continue: The main reason for plunging growth in August is tapered stimulus both on the monetary and fiscal fronts. Given poor economic data in Aug, the government would again ramp up policy support. Media reported yesterday that China’s banks plan to ease the mortgage lending policy for second-time home buyers. Although MER couldn’t confirm the news, such policy movement is highly possible. Meanwhile, MER continues to expect more mortgage policy easing, including targeted rate cuts for first-time home buyers. What is the short-term indicator MER pays attention to?

Well, recall that the rebound in the second quarter was largely driven by the surge in new loans in May and June. Therefore, MER would look closely at Sep new loans made by big-4 banks, which would be known to the market one week later.
 
Growth target likely to be lowered: Last week, China’s Finance Minister Lou Jiwei said that policy would not change materially just because of the recent slowdown. The media also reported that during the summer gathering in Beidaihe, China’s top leaders had agreed to accept growth below 7.5%. MER is glad if policy makers could see things this way. Given the repeated slowdowns so far this year, it is clear that China simply cannot grow at 7.5% without constant government stimulus. MER thinks that it is very likely for top leaders to lower the growth target this Dec, likely to around 7.0%. Or even better, they could scrap the whole thing of a growth target, and instead use growth forecast as what the Fed currently does. The benefit of a growth forecast is that it could guide market expectations without being too binding. With a lowered bar for growth for 2015 and more institutionalized anticorruption after the 4th Plenum to be held this Oct, policy makers could spend
more time on reforms.

Source: Macquarie Research - 24 Sep 2014