Markets buy China ‘safe slowdown’ story as manufacturing PMI dips to 16-month low

Stock markets across Asia on Monday shrugged off China’s weakest manufacturing data in 16 months, reading it as a sign of an economy in policy-driven soft landing — and not as a weakening of underlying economic fundamentals.

Under the influence of a government-engineered clampdown of an overheated property market and polluting industries, the semi-official manufacturing Purchasing Managers’ Index, released by the National Bureau of Statistics, fell to 51.2 in July from 52.1 in June and 53.9 in May. A second PMI, devised by HSBC, which is weighted in favour of smaller, private, export-oriented manufacturers, fell more significantly from 50.4 in June to 49.4 in July, the first time in 16 months it had slipped below the threshold of 50, which signifies a contracting economy.

Economists and analysts, however, reasoned that the Chinese economy was only witnessing a healthy “slowdown, not a meltdown” — and the equity markets were evidently convinced.

The Shanghai stock market closed up 1.3%, at its highest level in over two months. The Hong Kong market did even better, finishing up 1.8%, to close at its highest level in three months.

Qu Hongbin, HSBC’s co-head of Asian Economic Research, said the continued deceleration in China manufacturing PMI reflected “the combined effect of credit tightening, property cooling measures and Beijing’s measures to cut capacity in energy-intensive sectors.” However, he added, “there is no need to panic because this is just a slowdown, not a meltdown.”

Societe Generale’s chief of Asia economics Glenn Maguire saw “seasonal patterns” underlying the declines in the PMI indices, and said he expected the indices to recover ground and stabilise from here on “as the negative seasonal factor is likely to wear off into the third quarter.” In his estimation, the “fundamental outlook” for China’s economy remains “very much one of a soft-landing, not a double-dip.”

Barclays Capital analyst Jian Chang noted that the “underlying momentum” was stronger than the numbers indicated: While the July reading (of the NBS PMI) was the lowest since February 2009, it indicated expansion in manufacturing activity for the 17th straight month.

Even the decline in PMI for three months “only represents a slight slowdown of otherwise strong economic growth,” says Moody’s’ Economy.com analyst Tine Olsen. “Provided data releases over the coming months do not show that a sharp slowdown in growth is looming, policymakers are expected to continue with their agenda of gradual monetary tightening.”

Credit Suisse China economist Dong Tao too saw no reason for a “significant policy change” in the near future —even though the latest PMI data had “added downside risk to the growth outlook.” In his estimation, China is probably growing at around a “low 9% year-on-year or high 8% y-o-y rate” in the third quarter of 2010. This, he feels, “would still fit Beijing’s ‘voluntary tightening policy-induced slowdown’… We do not expect Beijing to reverse its monetary policy stance.”

Deutsche Bank’s chief economist for Greater China Jun Ma too feels that the weak PMI reports “will not be sufficient to lead to policy relaxations in the near term” since there were still “strong hawkish voices” in the policy circles arguing that the ongoing GDP deceleration is “desirable”, that policy stimulus “has been costly” and that property bubbles “are yet to be deflated.”