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Weaker PMI suggests growth losing more steam China’s official manufacturing PMI fell markedly, to a much weaker than expected 50.8 in September from 51.3 in August.

Key Quotes:

“This is also below the 51.3 average for January-August 2018 and the average of 51.6 in 2017, suggesting growth momentum continues to lose some steam. The fall was mainly due to: 1) the employment sub-index falling by 1.1 points to 48.3 (Jan-Aug 2018: 48.9; 2017: 49.2); 2) the raw material sub-index coming off by 0.9 points 47.8 (Jan-Aug 2018: 49.2; 2017: 48.4); 3) a production sub-index at 53.0 from 53.3 in August (Jan-Aug 2018: 53.1; 2017: 53.9); and 4) a drop in the new orders sub-index to 52.0 from 52.2 (Jan-Aug 2018: 52.7; 2017: 53.1.”

“The new export orders sub-index fell dramatically to 48.0 in September from 49.4 in August, implying rising uncertainty on the export outlook. The input price sub-index rose to 59.8 while the output price sub-index was unchanged at 54.3 however, we expect PPI inflation to moderate further in September given a high base last year.”

“The Caixin PMI also fell to a weaker than expected 50.0 in September from 50.6 in August (Consensus: 50.5; Nomura: 50.4), lower than both the Jan-Aug average of 51.1 and the 2017 average of 50.9.”

“Looking ahead, we expect more easing/stimulus measures to be rolled out in the coming months in an effort to offset both external and domestic headwinds. Easing measures, in our view, are likely to include but not be limited to, value-added tax cuts and one more 50bp reserve requirement ratio (RRR) cut at some point this year.”

“PMI for medium-sized enterprises tumbles By enterprise size, the drop was led by the PMI for medium-sized enterprises which tumbled to 48.7 in September from 50.4 in August (Jan-Aug: 50.2; 2017: 50.5), that for large enterprises was unchanged at 52.1 (Jan-Aug: 52.5; 2017: 52.8), while the PMI for small enterprises actually ticked higher, to 50.4 from 50.0 (Jan-Aug: 49.1; 2017: 49.0), possibly boosted by recent policy support to small and micro-sized enterprises.”

Non-manufacturing PMI rose, driven by construction sector  

“The official non-manufacturing PMI rose further, to a stronger than expected 54.9 in September from 54.2 in August (Consensus: 54.0;Jan-Aug 2018: 54.7; 2017: 54.6). By industry, the construction index jumped to 63.4 from 59.0, while the service sector index was unchanged at 53.4. The non-manufacturing PMI remains well above the manufacturing PMI, suggesting China’s primary growth driver continues to shift towards the tertiary sector.”

Q3 and September data forecasts  

“We expect real GDP growth to moderate to 6.4% y-o-y in Q3 from 6.7% in Q2 as headwinds blew strongly in the quarter (Figure 4). For the month of September, we expect activity growth (industrial production, fixed asset investment, consumption and trade growth) to all moderate, both CPI and PPI inflation to ease, M2 growth to remain unchanged, and credit supply (both new RMB loans and aggregate financing) to rise seasonally.”