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Print[Ferro-alloys.com]China's official manufacturing PMI rose to 51.0 in August from 50.3 in July, beating the consensus expectation of 50.6. This is a confirmation of the recovery trend indicated by the HSBC flash PMI released on August 22. Given that the official PMI is based on a much larger sample of 3000 firms compared with HSBC PMI's 400 samples, this new data point has its significance. In addition, even if one strips out the seasonality (i.e. the official PMI in August tends to increase by 0.4pts on a mom basis), today's PMI reading still shows an improvement in the underlying trend of industrial activities.
Of the components of the official PMI, the most visible improvement was seen in the sub-indices of raw material inventory and raw material prices, which were up by 2pts and 3.1pts respectively, suggesting that inventory restocking is underway. The sub-indices of new orders and new export orders were up 1.8pts and 1.2pts respectively, suggesting an improvement in domestic and external demand. The sub-index of the expectation of future production and business activities also increased by 3pts to 59.4 in August, indicating that business confidence has improved from its recent trough in June.
Looking forward, we expect economic activities to recover further in the remainder of the year and next year, reflecting a positive inventory trend, an
increase in the velocity of money (due to the rise in business confidence), faster real estate investment (given 30% yoy increase in land sales measured in GFA in H1 this year), as well as an improvement in G3 demand. In the coming 6-9 months, the recovery will most likely be led by stronger investment by real estate developers and infrastructure spending. The 3rd plenary session of the Party Congress in November, which will announce a major package of economic reform (e.g., with further deregulation measures), should give another boost to business confidence, in our view.
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