China Watch: Rebound in China's PMI Triggers No Change in Monetary Policy

China's PMI climbed +0.2 points higher to 50.9 in August. While the data came in slightly higher than market expectations, the detailed report evidenced that the momentum of manufacturing activities has weakened when compared with the same period last year. China's exports sector has also been affected by the headwind faced in advanced economies. The risk of inflation remains as input prices unexpectedly rebounded during the month. Premier Wen Jiabao reiterated yesterday that stabilizing overall price levels remains the top priority task of the government. In light of heightening risks of global economic slowdown, we doubt if the government will roll out more tightening measures. Yet, a reversal of policies implemented also appears unlikely.

The August PMI represented the first rise of the index since March. Despite that, the +0.4% monthly increase was less than that +1% increase the same period last year. Moreover, the level that the index has been hovering over the past 3 months is around 51, lower than 52 the same period last year. This signaled the government's tightening policy since October 2010 has taken effects. We expect growth in China will slow further but the risk of hard landing remains low.

Domestic demand resilient as 'production' index rebounded to 52.3 from 52.1, 'import' index picked up +0.6 points to 49.7 and 'new orders' index stayed unchanged at 51.1. However, external demand has obviously been hurt with 'new export orders' index slipping to 48.3 from 50.4 in July. China's largest trading partners, the US and the Eurozone, have been facing debt and economic problems recently. Fiscal- consolidative plans are expected to hurt the economy of both sides of the Atlantic and this would further impact China's external trade in the future. Note that, the drop in 'new export orders' suggested that domestic new orders actually rose in August from July.

'Input price' index climbed to 57.2 from 56.3. The first increase in 6 month signals that the upstream inflationary pressure has not eased. While we expect moderation in global commodity prices will ease price pressure in coming months, it's yet to early confirm the rebound was only a 'one-off' issue.

Premier Wen Jiabao said yesterday that China will continue to stabilize overall price levels in the economy and 'the direction of economic policy cannot change'. This suggests that the government will focus on controlling inflation although growth outlook both domestically and in overseas has deteriorated. Indeed, we expect the government will hike interest rates once for the rest of the year but it will most likely not reverse the tightening measures implemented.