JPM - China: NBS manufacturing PMI suggests expanding industrial activities

China’s two separate manufacturing PMI series drifted in different directions in March. The CLSA-PMI edged down 0.3pt, largely stable from the February level, while the NBS-PMI advanced solidly last month by 3.4pt to 52.4, coming above the 50 expansionary threshold for the first time in six months. The NBS-PMI is sending a clear signal that industrial activities, reflecting the balance of goods demand—from exports, inventory accumulation, consumption, and fixed investment—are expanding again. While the global demand has remained subdued, domestic demand is getting a powerful lift from the government’s aggressive fiscal and monetary stimulus.

Going forward, we expect continued improvement in industrial growth momentum, as the government’s aggressive stimulus on both fiscal and monetary fronts kicks into the economy powerfully in the current quarter, and the external environment improves gradually. It is encouraging that the inventory of steel products, especially long products, which are mostly used in construction projects, started to fall since last week, likely suggesting that the end demand is gathering momentum. Passenger vehicle sales have been strong since early this year, and the impressive recovery in property transaction volume has been sustained, and has been country-wide. On the monetary front, we estimate that strong loan growth continued in March, with new loan creation easily to be over Rmb1 trillion again last month, compared with Rmb1.6 trillion in January and Rmb1.06 trillion in February. We believe the credit expansion has further room to go and the market should not be surprised if total new loans in 2009 could be as high as Rmb7-8 trillion, compared with Rmb4.9 trillion in 2008. This is set to provide a very powerful stimulus for domestic demand.

Against the backdrop of heightened concerns on China’s unemployment and the risk on social unrest, it is encouraging to see that the employment component in the PMI series also picked up modestly to 48.6 from the all-time low of 43.0 in January.