Who you gonna believe when it comes to China’s economy?
If you’re an optimist, you’ll be inclined to go with the private Caixin survey versus the “official” PMIs.
Earlier this week, markets were dismayed when manufacturing, non-manufacturing and composite PMIs out of Beijing all missed expectations, adding to consternation about the world’s second-largest economy, which grew at the slowest pace in some three decades in the third quarter.
Fast forward to Friday and the Caixin survey tells a different story entirely.
The index jumped to 51.7 in October from 51.4 in September. That is the third month in expansion and one of the best readings in years. A year ago, the gauge was at 50.1. This marks a stark contrast to the official manufacturing PMI.
“October data showed the strongest improvement in operating conditions faced by Chinese manufacturers since February 2017”, the Caixin report reads. “Output and new orders both expanded at steeper rates, with the latter supported by a renewed increase in export business”.
Output rose to 53 from 52.5 last month. That’s the highest since December of 2016. New orders rose to their best levels since January 2013.
Employment appears to have been one of the only caveats to an otherwise rosy report. “In contrast, staffing levels declined further, with the rate of job shedding quickening since September”, the accompanying color reads.
“Both domestic and foreign demand improved substantially”, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said Friday, adding that although employment “continued to contract, if the improvement in demand, including that generated by infrastructure projects and exports, is able to continue, the manufacturing sector can gradually build a foundation for stability”.
Chinese stocks know which survey they want to believe. Friday was the best day for local equities since October 14.
And yet, worries persist. With officials still reluctant to countenance broad-based, “kitchen sink” stimulus to boost the economy, some commentators are beginning to raise the specter of stagflation.
After all, CPI is rising briskly on the back of exploding pork prices, while factory gate prices are mired in deflation.
That presents policymakers with a dilemma. Aggressive monetary easing could exacerbate the CPI gains, in addition to feeding the type of speculation and leverage that authorities have been keen to stamp out over the past several years.
10-year yields in China have risen some 30bps off three-year lows hit early in September, while equities are still down pretty handily since this year’s highs. The spread to Treasurys has exploded this year, alongside marked underperformance since April for A-shares versus the S&P.