PMI Data May Push People's Bank of China to Go Big on Stimulus

Early evidence that the economy is losing more momentum

PBOC Said to Consider New Lending Program

A downside surprise in the final reading of China’s HSBC Markit manufacturing PMI for April adds to early evidence that the economy continues to lose momentum heading into the second quarter. The case for a further cut in interest rates, perhaps as early as May, continues to strengthen.

The final reading for the HSBC PMI manufacturing survey came in at 48.9, down from 49.6 in March. That was lower than a flash reading of 49.2; the flash reading is based on 85 percent to 90 percent of total survey responses.

Minor movements in results from a relatively small-scale survey shouldn’t attract too much attention. Still, the miss relative to the flash and the lowest reading since April 2014 add to the sense of accelerating decline in China’s manufacturing sector.

In the details, both the output and new orders indexes dropped, pointing to weak domestic demand. New export orders climbed above 50, indicating that external demand may have improved slightly. A look at the sub-index on employment shows jobs continuing to contract in the manufacturing sector. Premier Li Keqiang has said that falling employment would cross the government’s red line — triggering a policy response.

Taken together, the early signs for April point to growing downside risks for the government’s 7 percent GDP growth target for 2015. Both the official and the HSBC PMIs remained weak. The flash reading for Korea’s exports, which move closely with China’s overseas sales, contracted. In April 30’s Politburo meeting, the government highlighted major downside risks to the economy.

There is room for further monetary easing. Despite recent moves, the central bank’s policy stance remains tight. High real interest rates and low loan growth continue to weigh on domestic demand, while the rise in the yuan’s real effective exchange rate undermines exports.

The People’s Bank of China may have to accelerate monetary easing to support the economy. In April, the PBOC surprised the markets with a one percentage point cut in the reserve requirement ratio — double the normal size. One possibility, flagged in the Chinese press in recent days, is that they could ’go large’ again with a 50 basis point cut in interest rates, double the normal 25 basis point move.

Market Reaction

Equity markets reacted negatively to the below-consensus data in the first five minutes after the release, likely reflecting concerns on a weaker economy ahead.

The Shanghai Composite Index dropped about 0.5 percent to 4,392 in the first five minutes after the data release, after a 0.6 percent fall in the earlier session. In the offshore market, the Hang Seng Index declined 0.4 percent, after a 0.2 percent increase in the earlier session.

In the currency markets, the onshore yuan was broadly flat at 6.2080 per dollar after the release, after falling 0.08 percent in the earlier session. The People’s Bank of China set a weaker daily central parity at 6.1165 for today. The Australian dollar dropped 0.2 percent to 0.7809 after the data release, following a 0.5 percent fall in the earlier session.

Fielding Chen are Tom Orlik are economists for Bloomberg Intelligence. This post is courtesy of Bloomberg Intelligence Economics.

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