Is China on the Rebound?

I spy with my little eye some positive data from China! Late last week, the Chinese Manufacturing PMI printed stronger-than-expected results, showing a 50.8 reading versus the 49.9 forecast. Since the reading is above 50.0, it means that the manufacturing industry is expanding.

However, results are contrary to the HSBC Final Manufacturing PMI, which just reported a contraction earlier today. It printed a reading of 49.2 which was lower than both the consensus and the previous month’s reading of 49.6.

Given the divergence between the two PMIs, which one should we believe? Both have their own merits, apparently. The disparity between the two indices has been fairly common in the past. In fact, in the past three months, China’s PMI indicated growth while the HSBC estimate suggested contraction in the manufacturing sector.

The results sometimes clash because the two reports differ in scope and focus. Remember, the data available to the government isn’t necessarily available to HSBC and vice versa.

One important thing you should note though is that HSBC’s version comes from an independent source. The reliability of China’s official reports, on the other hand, has been questioned many times in the past. But regardless of whether you doubt the accuracy of the official report, the upside surprise should ease pressure off Chinese officials.

Recall that Premier Li Keqiang mentioned in a speech last week that the government is expecting a slowdown in China’s stellar growth, and further easing could bring about new threats to its economy.

Now, with the manufacturing industry posting some surprise positive growth, the People’s Bank of China (PBoC) has one less thing to worry about, basically affirming the notion that there is no need to roll out further monetary policy easing measures.

And who could forget the markets? In the past couple of weeks, market participants have been revising their expectations on China after the IMF and the OECD lowered their growth forecasts. According to them, China’s growth could be hurt by weak global demand, fundamental economic problems, and the quick rise in credit. But with the growth in the manufacturing industry accelerating in May, it seems that China may already be rebounding from its slowdown in Q1 2013.

Market reaction

Lu Ting, an economist at the Bank of America, said the markets should react positively to the report at the start of the week as the unexpectedly strong results should somewhat quells fears of a deeper growth slowdown for the Asian giant. And from the looks of AUD/USD, he was right!

The Australian dollar seems to have benefited the most from this report as it’s off to a strong start to the week. Remember, China is Australia’s largest trading partner, so what’s good for China is usually good for Australia and the Aussie.

AUD/USD Chart

After gapping up 42 pips over the weekend, AUD/USD is now trading above the .9600 critical support level again.

But is this the sort of news that can provide currencies with lasting support? Maybe not. The markets will likely want to see the bigger picture and wait until they get their hands on a full set of economic reports before passing their judgment on China.

They’ll probably need to see improvements in the trade, industrial output, retail sales, and inflation reports due this weekend before they can breathe a sigh of relief and regain the confidence to continue buying higher-yielding currencies.


  • Amit Desai

    3 articles back we read an article on the 3 main reasons for lower Chinese forecasts. Now 1 report is +ve, and we read an article on the rebound. I would rather read an article with some meat rather than few quick ones with nothing in it.