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Fast Comment ChinaSlowdown not over yet

  1. Plunge in manufacturers’ confidence
  2. More stimulus lies ahead
  3. Room for policy easing is more limited than earlier
Plunge in manufacturers’ confidence
Confidence among Chinese manufacturers as measured by the manufacturing PMI from Markit nosedived from 49.7 in December to only 48.3 in January, the lowest since February 2016. By moving further into contractionary territory, the PMI strongly indicates that recent stimulus has not been enough to halt the growth slowdown. The authorities often announce stimulus measures right after weak economic key figures have been released. Note, however, that the authorities (contrary to us) prefer their own PMI gauge, the official PMI, which has a higher representation of the bigger, state-owned and less export-oriented firms. This measure increased slightly in January to 49.5 from 49.4 in December, maybe because the bigger firms to a larger extent are helped by the already announced monetary stimulus.
More stimulus lies ahead
However, both PMIs have dropped dramatically since last summer and indeed more stimulus measures are to be expected over the coming months. Monetary policy will likely be eased further with the first cut since 2015 in the still important benchmark lending rate getting closer. This, coupled with liquidity injections and cuts of the reserve requirement rate to push down market interest rates, should stabilise and maybe even lift credit growth slightly.
Room for policy easing is more limited than earlier
However, the room for stimuli is, in our view, more limited now than in earlier instances of slowing growth. The main reason is that boosting credit risks undermining and reversing the successful deleveraging campaign. Following more weakness in the coming months, stimulus measures will likely halt the declining growth and temporarily stabilise growth in Q2.

Source: Macrobond


Bjarke Roed-Frederiksen

Senior Economist

Latin America and China

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