Danske Bank provides the other side of the coin on the China story. They believe the markets are overreacting and that China is headed for a soft landing as inflation comes under control in H2:
“After having been largely unchanged in the previous three months, the flash estimate for the HSBC manufacturing PMI dropped markedly in June from 51.6 to 50.1, see Flash Comment – China: HSBC PMI declines but still suggests soft landing. There appear to be two main reasons for the weaker HSBC PMI in June. First, there are signs that weaker global growth is now starting to take its toll on China’s exports. Second, it appears that Chinese manufacturers cut inventory as the finished goods inventory component declined to the lowest level since March 2009. Hence, as a sign of stabilisation, the new orderinventory balance actually improved for the third month in a row in June. Finally, on a positive note, the output price component in the survey dropped markedly, suggesting that inflationary pressure is easing.
While the weakness in export orders is a concern, the development in HSBC manufacturing PMI is consistent with our view that GDP growth in China is poised to slow to the 7-8% q/q AR range in Q2 from about 10% q/q AR in Q1 (according to our own seasonally adjusted data). For monetary policy the implication is that the pace of monetary tightening will ease and the People’s Bank of China will probably soon go on hold – albeit monetary tightening might have to be resumed at some stage next year. We still expect another rate hike in China soon, but admittedly our case for a second rate hike later this year is starting to look weak.”
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