China posts another weak PMI

The Chinese Markit "flash" manufacturing PMI remained weak in May at 49.1, below market expectations (consensus: 49.3). Although the headline PMI improved from its previous final reading of 48.9, the output sub-index slumped to 48.4 from its final reading of 50.0 in April, touching a 13-month low. 

Furthermore, the new export orders index fell to a 23-month low of 46.8, while overall new orders shrank for the third straight month. Output prices and input prices continued to decrease, adding to deflationary pressures. The employment and backlog of work indices also declined, though at slower rates.

The subdued flash PMI print suggests there is no clear sign of a near-term stabilisation in the economy. Risks to the outlook remain to the downside, with the property market correction and government-led infrastructure projects both key for the economy.

Barclays believes, soft external demand, accompanied by a strong CNY, will weigh on export demand and GDP growth in Q2.

Nevertheless, there are several indicators, which, if they improve, could point to early signs of a stabilisation (turnaround) in Q2 (Q3): 

1) a reduced contraction in import volumes 

2) a sustained pickup in property sales

3) a continued increase in electricity usage by the manufacturing sector, accompanied by fast-growing usage by the service sector

Barclays maintains baseline GDP growth forecasts of 6.7% y/y in Q2 and 6.8% for the full year (Consensus: 7.0%) in view of recent policy actions such as rate cuts and the LGV debt swap programme. On the quarterly growth profile, our forecast implies a modest pickup in sequential growth from 5.4% to 6.6% q/q saar in Q2, followed by a significant improvement to 7.8% q/q saar in Q3. Analysts look for further benchmark rate cuts of at least 50bp in total by Q3 and a removal of the deposit rate ceiling. 

"Two additional RRR cuts is expected by Q3, with the risk of more easing if economic growth fails to stabilise by mid-year" according to Barclays.