China SMEI: Cautious on over-optimism – Standard Chartered

Lan Shen, economist at Standard Chartered, suggests that the China’s April SMEI survey indicates a continued improvement in SME performance but a softening of the near-term outlook.

Key Quotes

“The headline SMEI (Bloomberg: SCCNSMEI ) – based on our monthly survey of more than 500 SMEs nationwide – eased to 56.8 in April from 57.1 in March. The ‘current performance’ sub-index strengthened in April, following the rebound in March, suggesting continued momentum following the post-holiday normalisation of activity. However, the ‘expectations’ sub-index fell for a second consecutive month in April, suggesting a possible stabilisation in Q2, rather than a material recovery.”

“The sub-component readings of the ‘current performance’ sub-index showed a mixed picture. Domestic demand held up in April, while exports orders softened. Resilient sales following the Lunar New Year holidays drove a recovery in production activity and hiring. However, downward pressure on output prices weighed on the profitability outlook. Investment appetite remained sluggish in April, partly due to the weaker expectations on profitability.”

“The ‘credit’ sub-index edged down to 53.2 from 53.7 in March. Banks’ willingness to lend to SMEs reached a record high, reflecting the impact of authorities’ efforts to direct financial resources to SMEs. However, borrowing costs from both banks and non-banks were elevated, indicating an increase in risk premium. We expect SMEs’ credit conditions to improve further on heightened policy support.”