China's September ‘flash’ PMI hints slow growth rate in Q3

The Caixin "flash" manufacturing PMI of China slipped to 47.0 in September, coming in below expectations and reaching its lowest level since March 2009.  New orders - a key proxy for both domestic and overseas demand - fell to 46.0 from 46.6 in August, with the export orders index contracting at its fastest rate since mid-2013. Other subcomponents, including employment, output and input prices, also deteriorated, with the exception of inventory that showed a modest expansion. 

"Based on the newly developed GDP tracker, China's Q3 GDP growth (y/y) will be dragged down by about 20bp due to the lower Q3 Caixin PMI, everything else being equal. The multi-year low in the PMI confirms the economy will face strong headwinds before finding a new steady state. We continue to look for more fiscal and monetary easing in Q4 to support growth, but do not expect that to change the economy's structural softening trend", said Barclays in a research report. 

In addition, August data for deposits and FX transactions confirm that capital outflows from China surged, echoing recent selloffs in other EM markets. As a result, despite short-term liquidity injections by the PBoC, one benchmark rate cut in Q4 to lower real funding costs and two RRR cuts to offset the liquidity drain from capital outflows, foresees Barclays.