Economic Highlights (China) - 03/04/2014

China:  Non-manufacturing PMI Weakened, while Pro-growth Measures Announced

• China’s official non-manufacturing PMI (business activity index) edged lower to 54.5 in Mar from 55.0 in Feb on a seasonally adjusted basis, pointing to a slower growth in the non-manufacturing sector after gaining some momentum in the prior month. The renewed moderation in the PMI, together with the weak upturn in manufacturing activity in Mar, suggested that GDP growth has likely slowed further in the first quarter. The non-manufacturing PMI averaged 54.3 in 1q, down from 55.6 in 4q13, while official manufacturing PMI averaged 50.3 in 1q, down from 51.3 in the prior quarter.     

• In Mar, business activity expanded at a weaker pace mainly due to a slower growth in domestic demand, as reflected in a fall in the rate of expansion in new orders. The overall new orders sub-index for 27 industries surveyed fell to its lowest level in eight months in Mar, down from 51.4 in Feb to 50.8, partly dragged down by decreases in orders in the catering, real estate, handling and warehousing, as well as road, railway and air transportation industries.

• Nevertheless, Mar saw a marked improvement in foreign demand, which provided some support to the business activity index. The new export orders sub-index turned into an expansion at 51.7 from 48.3 in Feb, partly helped by a strong turnaround in orders in the services sector. There was also a further increase in non-manufacturers’ business confidence, with the business expectation component rising 1.6-pts MoM to 61.5 in Mar, the highest reading since Sep 2013. Employment meanwhile rose for a second straight month, partly driven by faster increases in services employment while the rate of job growth moderated in the construction sector. On the other hand, output prices decreased further in Mar, despite at a slower pace, while input costs increased at a faster rate, suggesting an underlying weakness in pricing power due to slower demand.    

• Among the major industries, the business activity index for services sector dropped from 53.8 in Feb to 52.8 in Mar, mainly due to slower growth of new orders. Sentiment among services companies showed further improvement, while employment and new export orders expanded after having fallen in the prior month. Meanwhile, construction activities strengthened. The business activity index for construction sector rose from 59.9 in Feb to 61.3 in Mar, partly attributed to a more conducive weather and the effect of the government infrastructure projects, in our view. Despite the increase in the business activity index for construction, the rate of growth of construction employment and confidence slowed in Mar, likely affected by slower increases in new orders and the continued contraction in new export orders.  

• Overall, Mar data indicated that the non-manufacturing sector has slowed, attributed to a slowdown in domestic demand while external demand picked up. Despite the slowing in non-manufacturing activity, its pace of growth is still relatively strong compared to the manufacturing sector. We believe the near-term outlook for non-manufacturing activity remains positive, as the sector continues to receive support from the government in China's transition towards a more services-based growth path.

• Meanwhile, we expect the economy to stabilise and regain momentum in 2q, following the latest announcement by the State Council on 2 Apr to introduce more measures to support domestic demand and growth. These new measures include the extension of tax breaks for the small and micro firms until the end of 2016 (instead of the end of 2015), speeding up railway development and construction, and providing greater support for the redevelopment of run-down areas and basic urban infrastructure construction. Specifically, 6,600 km of new railway lines are planned to commerce operation this year, which is 1,000 km more than last year. To ensure funding for the railway construction, a railway development fund will also be established, along with intended greater participation of private capital and the issuances of up to 150 billion yuan of railway bonds this year. Moreover, the government will consider raising the annual taxable income threshold for small and micro businesses from the current level of 60,000 yuan. These are expected to boost investment, which remains a key driver for China’s economic growth. We think the 7.5% economic growth target for 2014 is achievable, with the help of a slew of pro-growth measures as well as the slightly expansionary fiscal policy this year. We maintain our projection that China’s real GDP is likely to grow by 7.8% in 2014, up from 7.7% in 2013, as the government stands ready to support the economy through the acceleration of urbanisation, increased infrastructure investment and a series of targeted measures.

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