China's August PMI rebounded to 51.7 from July's 51.2. We have highlighted on previous occasions that the series undergoes a seasonal weakness during the months of May to July. The rebound is very welcome news, given the recent spate of poor global economic data, which has triggered fears of a double-dip recession.
Gains were broad-based, with the key components of output and new orders rising to 53.1 from 52.7 and 50.9 respectively. New export orders also posted a one-point gain to 52.2 in August. Input prices clocked the biggest jump, rising to 60.5 in August from July's 50.4. These sharp gains are likely to be inflationary and suggest that the authorities are unlikely to reverse monetary policy normalization any time soon.
Indeed, we continue to expect the CNY to gain as much as 5% versus the USD in the next 12 months. That said, given the moderating global outlook, the likelihood of the authorities pushing back rate hikes to 2011 is gradually rising.
From an equities’ perspective, we regard this set of data as neutral, which largely meets expectations. While decelerating infrastructure growth should remain a concern, a potential re-acceleration of property-related investment growth in H2 could offset most of the potential impact. If the PMI rebound continues into the coming months, the Beijing government would have more leeway for a more determined second round of property tightening. This rising policy risk supports our call for not turning too bullish on China's property stocks yet. On the other hand, the interim reporting season has just ended with few positive surprises. While earnings growth for the key sectors (e.g. banks, telecom and energy) largely meets expectations, some of the smaller ones disappointed (e.g. insurance, sportswear, food and beverage, gaming, steel, aluminum). Fortunately, most managements still forecast a cautiously positive outlook in H2.
Without a clear policy signal or a fundamental change, both the A and H share markets are likely to stay directionless and rangebound in the near term. A lack of strong internal catalysts would expose the China markets, in particular Hong Kong H shares, to changes in the global equity markets and risk appetite. While risk-tolerant investors may consider trading the range, long-term investors should selectively increase positions in China equities ahead of the rebound in Q4. We have fine-tuned our top BUY list after the interim results; these include China Construction Bank-H (939 HK), China Railway Group-H (390 HK), CNOOC (883 HK), Angang Steel (347 HK) and Belle (1880 HK).
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