Chinese business activity data to be released Friday morning should be markets’ key focus ahead of US labor data. Overall, we expect both official (CFLP) and onshore private sector (Caixin) measures for manufacturing, and the official (CFLP) services index, to show a modest uptick.
Fundamentally, the rationale for such view is that businesses should be reassured after recent rebound of equity and currency markets, and given announcements at the National People’s Congress of fiscal and (planned) monetary easing. In case of the official manufacturing PMI, March also tends to bring a seasonal pick-up.
Finally, the private onshore (Caixin) manufacturing PMI tends to be well correlated with the so-called ‘Satellite’ index, a private offshore measure based on imagery from thousands of China’s manufacturing sites. This ‘Satellite’ indicator, released well in advance and already known for the month of March, has recently moved higher, which bodes well for the ‘Caixin’ index, and – perhaps with some delay – for the official reading as well. That said, it is helpful to take a step back to interpret such potentially improved readings, because they will still be below historical averages and – for manufacturing PMIs – below 50pt.
Our view is that the 50pt level is not an expansion – contraction threshold for Chinese PMIs, as evidenced by the positive growth of industrial output regardless of manufacturing PMI readings, and by the fact that the output sub-index of official PMI remains above 50pt. Moreover, as China’s economy will stay on its long-standing decelerating trajectory, the trend for PMIs will continue to be downwards regardless of the fact that the March readings should be improved, and this is consistent with modestly slower but still strong GDP growth.
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