China’s official manufacturing PMI is expected to drop 1 point to 49.5 in June, from 50.4 in May when the official number is out this weekend, according to Societe Generale analyst Wei Yao.
This decline is in part because of insufficient seasonal adjustments i.e. while the PMI is supposed to be adjusted you can still see a clear seasonal pattern.
“The official series usually moves up continuously between February and April and then declines persistently throughout the summer before rebounding in August or September,” according to Yao. “We expect this pattern to further drag down the reading in the next two months, on top of genuine weakness in the economic fundamentals.”
Moreover the flash PMI report earlier this month showed production, new orders, and supplier-delivery time all declined. Trade growth is unlikely to hold up.
Given the softness in the economy, the central bank is expected to announce a reserve required ratio (RRR) cut in July. The most powerful tool for the moment though is bank lending, and new loans are expected to rise to 1 trillion yuan in June.
Here’s a chart from SocGen that shows weakness and seasonality in Chinese PMI data:
Photo: Societe Generale
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