China’s official reading of manufacturing activity might have dipped to an eight-month low in July but economists say the figure masks an economy that has already bottomed and on track for a rebound in the second half.
China's Purchasing Managers' Index
Helen Qiao, Chief Economist for Greater China with Morgan Stanley, said the July reading usually declines by about 0.8 percentage points from June on average every year.
“If it does come out around this level, we would say that after seasonal adjustment, actually this number implies a pretty notable rebound in terms of growth momentum,” Qiao told CNBC Asia’s “Squawk Box” on Wednesday before the release of the number.
The July reading in 2011 slipped to 50.7 from 50.9 in June. In 2010, the reading plunged to 51.2 from 52.1. In 2009, the PMI inched up to 53.3 from 53.2 because it was coming out of the 2008 recession.
Dariusz Kowalczyk, Senior Economist and Strategist for Asia ex. Japan with Credit Agricole, said the reading is consistent with positive growth momentum of industrial output and much better than during the Lehman crisis, when the PMI plunged to the high 30s.
“A drop in the index of inventories of finished goods may mean that de-stocking has ended, which implies that any pick up of demand (stimulus-driven) should translate to higher output,” he said. The finished-goods inventory fell to 48 from 52.3 in June, the official reading on Wednesday showed.
Kowalczyk is sticking to his forecast that China’s economy will expand 8 percent this year.
“It is worth remembering that the index almost always falls in July,” he said. “Moreover, HSBC PMI rose in July, and so has the average of the two.”
A final reading of the HSBC PMI in July, also released on Wednesday, showed
Even then, some economists say the manufacturing sector is still weak and will need more help from the government, especially after the central committee of the Chinese Communist Party signaled on Tuesday that stable economic growth will be a
“It is no surprise that the Politburo called for a strong pro-growth policy stance yesterday, singling out exports and employment as areas to be supported,” Credit Agricole’s Kowalczyk said. “We still do not expect another rate cut, but its odds are up to about a third now from a quarter yesterday. We see a fairly imminent 50 basis points RRR (reserve requirement ratio) cut instead and more infrastructure spending.”
Nomura’s Chief China Economist Zhiwei Zhang also expects a 50 basis points cut in the RRR in August and more public spending in the third quarter to boost growth.
- By CNBC's Jean Chua.