China: Official PMI fell further in July – Nomura

China’s official manufacturing PMI moderated in July to 51.2 from 51.5 in June, in line with Nomura’s forecasts but slightly below market expectations of 51.3, notes the research team at Nomura.

Key Quotes

“The new order sub-index, which is a good leading indicator, dropped to 52.3 in July from 53.2 in June. Despite monetary easing and the announced fiscal stimulus, we still see strong headwinds and expect the economic growth to weaken further before staging a moderate rebound, so we expect the manufacturing PMI to decline further in coming months.”

“More specifically, we expect infrastructure fixed asset investment growth to recover from its current low over the next couple of months, but export growth to slump in Q3 nevertheless.”

“We remain cautious on calling a growth rebound for the following reasons: 1) the starting and implementation of new projects takes time, especially as local governments still face a credit squeeze; 2) the pledged supplementary lending (PSL) and cash settlement of the shanty town renovation program are not sustainable, in our view; 3) it takes time to unwind some of the previously implemented deleveraging measures; and 4) already high yields of Chinese corporate onshore and offshore high-yield dollar bonds have made bond financing much more difficult for LGFVs and enterprises.”