The official manufacturing PMI for China came in at 51.4 in July (51.5 expected, 51.7 previous), and the non-manufacturing PMI at 54.5 (54.9 previous). So at a headline level and at first glance the numbers were down and dissapointed against expectations. The 3-month moving average of the two combined was up +0.1 to 53.0 – which is part of the “good” news within the reports, and lines up with the improvement seen in the copper price, as displayed in the chart below. Indeed, the China stimulus/property induced rebound has been a key driver for commodities and is a front-of-mind theme for us.
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Into the details let's review the bad and good. On the manufacturing PMI, it was large companies up (+0.2 to 52.9) and medium and small down (-0.9 to 49.6 and -1.2 to 48.9 respectively) - this goes to show that it's the large SOEs doing the heavy lifting (at the direction of the govt) vs the smaller companies which are still under pressure. On the non-manufacturing PMI, services were down -0.7pts to 52.9, yet the construction side was still booming +1.1 to 62.5 - a sign that the property sector is still going strong and carrying growth. Yet another point, was that the breadth of the manufacturing PMI improved (graph 1 below).
Overall it's property and SOEs that are driving growth, with an added tailwind from improved global trade activity, and my take on the data is that it's reasonably good, if stimulus/property driven, and short-term supportive for commodities.
The manufacturing PMI was down on a headline basis, yet the breadth of the subindexes improved - overall on this front the Chinese economy is doing much better than a year or so ago.
The improvement in the trend of the combined PMI indicator is consistent with the strength seen in copper, and aligns with the conclusion that the short-term macro pulse is commodity positive.
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Article by Callum Thomas, Top Down Charts