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China’s PMI review

Jerry Chen
Research Strategist
3 Mar 2020
China’s economy might brace for a worse-than-expected Q1 contraction, according to officials and Caixin PMIs in February.

Data review

China’s official Manufacturing PMI in February plummets to a record low of 35.7 from 50 the previous month due to the coronavirus outbreak. It’s far worse than the medium estimation (45) and even lower than the numbers during the GFC.

Manufacturing PMI (white) and non-Manufacturing PMI (yellow)
PMI chart
Source: Bloomberg

All subcomponents fell sharply, with output (27.8 vs 51.3 in January) and new orders (29.3 vs 51.4) contributing the most as they are a combined 55% weight in the calculation. Despite all industries have fallen into contraction territory, food processing and pharmaceutical manufacturing outperformed other industries.

Non-Manufacturing PMI in February printed at 29.6, nearly half of the previous 54.1 and well below the lowest estimation (42) and GFC figures.

Caixin China Manufacturing PMI released Monday also sits at a record low of 40.3. Caixin PMI includes only 430 small-to-medium companies in the sample, while China’s official PMI is based on a survey of 3000 large companies spread across 31 manufacturing industries.

Regional and global impact

The virus outbreak has been largely disrupting supply chains due to travel restriction, shuttered business and increasing delayed shipment. The fallout can be clearly seen in the Manufacturing data from South Korea (yellow), Japan (purple), Taiwan (red), and Vietnam (green).

Manufacturing PMIs in Asia
Manufacturing PMI chart
Source: Bloomberg

The economic impact is not only confined to Asia. The JPMorgan Global Manufacturing PMI in February fell 3.2 points to 47.2, suggesting that global economies may face the biggest risk since the global financial crisis, perhaps even worse.

OECD has cut global growth in 2020 to 2.4% from 2.9%, which would be the weakest numbers since 2009.

Impacts on financial markets

Chinese markets on Monday seemed to ignore these poor numbers, with the offshore yuan (USDCNH) further strengthening to 6.96 per dollar and the benchmark index CSI 300 up by 3.29%.

The recent broad USD weakness has lent support to CNH, which has rallied in all trading sessions last week and is now firmly trading below the 7 handle. On the other hand, the daily reference price of onshore yuan (USDCNY) was set at 6.9811 yesterday, the strongest level since middle February.

We have also seen a very bullish daily candlestick from CN50, an alternative investment of mainland China’s stock market. CN50 is now testing the 50% retracement level, with the RSI developing above 50. The February high of 13984 will be the immediate challenge, but on currency price action and technical set-up, the trading bias is for higher levels in the near-term.

CN50 daily chart
CN50 daily chart
Source: MT4

As the covid-19 virus stabilises across China and the expectation of massive stimulus measures boost confidence, the stock market is reflecting positive sentiment with expectations of a potential strong rebound in the following months. The potential synchronised easing actions by global central banks (like the Fed, BoJ and BoE) are fuelling the rally.

Since the yield spread between China and the US is picking up, yuan-related assets might appeal at the moment.

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