For the past 4-5 months, most China PMI figures showed a picture of slowing growth and rising inflation, a "bad" macro data mix that led to a fear of stagflation. This is now being reversed. In March, HSBC’s manufacturing PMI rose to 52.5 (a HSBC PMI of 52.5 suggests that the official PMI should be around 53.5), up from 51.7 in February. At the same time, the input price sub-index fell. These changes point to a lower risk of hard landing and reduced pressure for inflation. For the first time in the past many months, the PMI report is now revealing positive changes in the macro environment.

The major improvements in the PMI report include a 3ppt rise in the new export orders index (to 52.7 in March), a 3.2ppt rise in the output index (to 55.1), a 5.1ppt fall in the input price index (to 69.5), and a 3.5ppt fall in the output price index (to 57.2). The rise in the output index suggests that sequential economic growth (i.e. IP growth) will likely accelerate again from late Q2 after a few sluggish months. The stronger export orders index points to better export growth in the coming months, and should help lift market sentiment on trade-related sectors after the disappointing figure (which was distorted by CNY) in February. The fall in both the input and output price indices suggest that PPI inflation will becomes less of a driver for CPI inflation going forward. Together with the 6% drop in agriculture prices in the past 50 days, these manufacturing pricing trends reinforce our view that the sequential (mom) peak of inflation is already behind us and we are very close to the yoy peak of CPI inflation.

This PMI report is the first important macro data point that supports our positive outlook for the China market since the publication of our report on "Turning Bullish on China" last Tuesday. In the coming few months, we expect many more data points to confirm the beginning of disinflation, the easing of pressure for policy tightening, and the falling risk of a hard landing

• [Editor:editor]