Economy–HSBC June PMI down further

HSBC advance manufacturing PMI declined 0.9 ppts from May’s final reading to 48.3 in June,falling for the third straight month, and the second consecutive month that the reading was below50, the point that separates contraction from expansion. The decline was due mainly to significantdrops in output and new orders indices. In June, new orders index fell 1.6 ppts from May to 47.1,and output index fell 1.9 ppts to 48.8%. June’s PMI tumble is likely due to weak exports growth,which caused weak orders and output for SMEs. But judging by the fact that power outputgrowth picked up in June over May, growth of industrial output of enterprises above thedesignated scale hasn’t shown signs of slipping. We expected that June economic growth will belackluster. Given capital flight is in progress amid tightening liquidity, market interest rates remainhigh. Capital might continue to flow back to the US where the economy is recovering, whichwould further affect liquidity in China and could prompt the People’s Bank of China to loosenmonetary policy. However, as China has grown increasingly tolerant of slow economic growth andhas recognized the need for economic restructuring, China’s monetary polices are unlikely to beeased up much. We expect that in 2H13, the People’s Bank of China will increase net capitalinjection in the open market and there is a chance that the required reserve ratio will be lowered.Rate cuts remain highly unlikely and liquidity looseness in 2H13 is unlikely to match that in 1H13.Tightening liquidity means credit growth will slow in 2H13 when economic recovery will be limited.However, the near-term bottom is at hand. June official PMI is expected to fall to 50.3.