China’s tightening monetary policy appears to be yielding some results, according to the new data on manufacturing and anecdotal evidence on housing prices.
The official Purchasing Managers Index (PMI), released by the National Bureau of Statistics of China, in conjunction with the China Federation of Logistics and Purchasing, has fallen 6% since September 2011 and 4% since the beginning of the year. In July, the PMI level stood at 50.7 down from 50.9 in June, depicting a slowdown.
The unofficial Manufacturing PMI conducted by HSBC and Markinor reflects a contraction, from 50.1 in June 2011 to 49.3 in July. HSBC’s surveys mostly SMEs - with a proportion of about 70% - which are more sensitive to monetary tightening given their dependence on outside borrowing, which would thus explain the contraction in manufacturing activity.
Inventories both of inputs and finished products are contracting, showing that both manufacturers and retailers are cutting back in response to tighter market conditions.
Consumer confidence has also declined, with the May 2011 reading down to 105.8 from 106.6 in April. Retail sales have mirrored this trend, with a softening growth from 10.94% year-on-year in May to 10.69% in June.
Possible slowdown in property prices:
China Securities Journal reported that the price of new homes sold in July in Beijing averaged CNY16,492 (USD2,554) per square meter, their lowest level since April 2010. Sales rose 8.4% month-on-month in July, to 8,969 units, with anecdotal evidence pointing to wide discounts available to boost transactions. The official newspaper noted that property stock in the capital was up to 143,496 units, and as such, there would be downward pressure on the market.
Continued tightening:
We expect Chinese authorities to continue monetary tightening as the inflation rate remains elevated. As we mentioned before, monetary tightening is still benign compared to previous cycles. In the last tightening cycle, the benchmark lending rate rose to 7.49% as inflation peaked at 8.7%. Although Broad Money Supply growth has been declining since March this year, it seems to have rebounded, rising by 15.9% in June from 15.1% in May.
Xhanti Payi
Assistant Economist
Download the presentation slides