China: SMEI shows early signs of stabilisation – Standard Chartered

Standard Chartered analysts points out that their latest nationwide survey of SMEs in China showed initial signs of stabilisation in October.

Key Quotes

“Our headline SMEI (Bloomberg: SCCNSMEI ) picked up to 54.5 from a record low of 53.1 in September; the growth momentum indicator (new orders minus finished-goods inventory, 12mma) stabilised at the bottom. All three sub-indices of ‘current performance’, ‘expectations’ and ‘credit conditions’ rose during the month, increasing the likelihood of a tepid recovery in Q4 on continued counter-cyclical policy measures.”

“Real activity indicators improved across the board in October. Sub-component readings by sector suggest that domestic demand recovered slightly, driven largely by a stronger performance in the construction and manufacturing sectors on the back of policy support.”

“This drove an acceleration in production activity and investment, and boosted financing demand during the month. External trade remained a major headwind to the economy, reflected in weaker export orders and a deterioration in exporters’ performance. We expect enhanced counter-cyclical measures in Q4 to boost domestic demand and shore up the economy.”

“SMEs’ credit conditions remain a concern. The ‘credit’ sub-index rose in October on improved cash flows at SMEs, but their access to bank credit did not improve, which kept their borrowing costs high. The central bank reiterated that it will lower financing costs via reform of the interest-rate transmission mechanism.”

“We forecast another 50bps cut in the reserve requirement ratio (RRR) before year-end, two 10bps cuts in the medium-term lending facility (MLF) rate (in Q4 and Q1-2020), and tighter regulations on structured deposit products, which should gradually lower the loan prime rate (LPR) in the coming months.”