This one chart shows the competing views of where China's manufacturing sector is headed

Having seen manufacturing activity across smaller Chinese firms tank in July, the markets are once again uneasy about the prospects for China’s economy, and the reliability of the government’s economic data.

Last Friday the Caixin-Markit flash manufacturing PMI gauge for July dropped sharply, falling to 48.2, the lowest level seen since April 2014. The reading, well below the 50 level that separates industry expansion from contraction, has got many in the markets asking why a private-sector survey is pointing to renewed economic weakness when most other government industrial data has been strengthening in recent months.

As the chart from ANZ shows below, while the Caixin-Markit survey tends to be more volatile, it has vastly under-performed the NBS manufacturing PMI survey, released by the government, over the entirety of 2015.

While ANZ believe the government’s manufacturing PMI gauge for July will remain above the 50 level, indicating an improvement in activity, they suggest it could fall from the 50.2 level achieved in June, particularly given recent weakness seen in Taiwan sales orders from China and Hong Kong in June.

“In a light data week, we will be watching for any deviation of the official PMI from Markit’s reading, which reported 48.2 for July. The newly branded Caixin’s PMI surprised on the downside and slid to 48.2 from 49.4 last month. Keeping in mind the rebound in industrial production in May and June, the odds are for the PMI to have maintained a positive margin above the 50 threshold, although it has likely declined.

Historically, the official PMI that has a larger sample size used to be more resilient and less volatile. Nonetheless, the export-order data from Taiwan last month showed a 11.8% y/y drop in sales orders in June from the mainland and Hong Kong, suggesting that regional supply chain activities are continuing their downtrend”.

While there are obvious distinctions between the Markit and NBS surveys — the former is conducted by a private-sector firm covering smaller manufacturing firms while the latter is released by the government covering all manufacturers, both large or small — another reading above 50 on Saturday will likely see scepticism over government data releases yet again come to the fore.

The reason for this is simple.

Although different surveys covering different sized firms, it’s hard to believe that two reports which cover the same sector can reflect such opposing views.

The NBS will release its manufacturing report for July at 11am AEST on Saturday.

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