Animal Spirits In China

The latest official PMI data out of China showed a slowing of momentum in the manufacturing sector (51.3 in January vs 51.6 in Dec and a peak of 52.4 in Sep 17), while non-manufacturing improved further (55.3 vs 55 in Dec). The improvement in non-manfacturing was largely a services story, with the services index up +1pts to 54.4 and construction off -3.4pts to 60.5. So from a cyclical standpoint the manufacturing/export sectors appear to be showing cracks, while services are improving.  This is important for a few reasons, and highlights also a separate topic of booming consumer confidence (chart 3).


As we saw in 2015/16 China can have a substantial impact on the global economy and financial markets, so it pays to keep on top of the macro currents there.  At this stage the early signs of slowing growth in manufacturing and trade, and a slowing of property price gains raise question marks on the outlook for China this year.  Despite strong consumer confidence, China macro remains the key risk area to watch in 2018 in our view, as previously noted.

Some of the takeaways and conclusions from this note are:

  • The Chinese manufacturing PMI has been losing momentum as stimulus effects wane.
  • Rail freight turnover growth is rolling over, creating question markets on the trade outlook.
  • Yet services are holding up strong, and consumer confidence is the highest since 1993.
  • The early signs of slowing growth and the importance of China in the global macro and markets picture highlights the importance of keeping on top of the trends in China this year.
  1. Manufacturing PMI: China’s manufacturing PMI fell again in January, yet at 51.3 remains in expansionary territory.  Unsurprisingly the large firms (often SOEs which have better access to credit and state support) are doing fine (large enterprises index at 52.3) vs the small firms, which are still struggling (small enterprises at 48.5).  Troublingly, the breadth of the sub-indexes also fell, which marks an about face since the stimulus-driven rebound over the past 2 years and overall there appears to be a slowing of momentum.  This is consistent with the easing off on new stimulus measures which we highlighted in the 2018 outlook.

China Manufacturing vs Consumer

  1. China Freight Turnover:Rail freight traffic (and waterways freight traffic) saw a massive turnaround from the low point in late 2015 (caused by a combination of strengthening currency and weak global trade – which itself was a product of slower growth in China and Emerging Markets), but is rolling over again as base-effects set the bar high and activity plateaus.  The recent bout of strength in the Renminbi will only add to the difficulties here.  This will be a key series to track on the cyclical outlook for China this year.

China Manufacturing vs Consumer

  1. Consumer Confidence: The final chart shows a different side of what’s going on in China right now. The NBS/official consumer confidence index is at the highest level since 1993. The main driver has been the “expectation” index at 125.9 vs the “satisfaction” index at 117.6.  A separate survey, the Thomson Reuters/Ipsos China consumer sentiment index has likewise been running strong.  A key reason is probably asset prices (strong property price growth and gradual rise in stock prices), and a stronger Chinese Yuan (the other side of the export equation – stronger currency improves purchasing power of consumers).

It goes to show that there are two sides to China’s economy: the old manufacturing and export base, and the property-consumer-services side. Yet not to get too carried away, we remain cautious on the outlook for the property market this year with a number of leading indicators pointing to at least slower price gains.  Likewise a slowdown in the manufacturing and trade sectors will also be cause for concern for the broader economy, which is still undergoing a slow but steady transition from an export-led economy to consumer.

China Manufacturing vs Consumer

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Article by Callum Thomas, Top Down Charts