PBOC stabilizes Chinese manufacturing, sustains bull market

Looks like government monetary policy and reforms are sustaining China’s manufacturing sector as well as the current bull market.

The latest data show that the Chinese manufacturing sector continued to expand in April, on expectations of more easing or monetary policy, although at a stable pace.

The official manufacturing Purchasing Managers’ Index was 50.1 in April. Any number above 50 signals expansion. It beat the 50.0 median estimate of economists surveyed by Bloomberg News. The production sub-index posted at 52.6, the highest monthly reading since November last year.

This follows the expansion of the previous two months. In February, the PMI rose to 49.9 after hitting a recent trough of 49.8 in January, according to the statistics bureau and the China Federation of Logistics and Purchasing in Beijing. Then it grew to 50.1 in March.

Much of the growth is credited to the People Bank of China’s (PBOC) two recent interest rate cuts, and the reduction of banks’ reserve requirement ratios. On Thursday, China’s Communist Party leaders reportedly vowed to take more steps to prevent a deeper slowdown. This may include unconventional policies such as a Pledged Supplementary Lending program that channels money to favored areas of the economy.

“Chinese companies are cautiously optimistic over China’s economic growth prospects, thanks to a string of encouraging signals in both the Chinese and global economy and a price rebound in commodities such as oil,” Zhao Qinghe, a senior analyst with the National Bureau of Statistics, told China Daily.

Non-manufacturing PMI, a gauge of services and construction, fell to 53.4 in April from 53.7 in March.

The PBOC’s actions are spilling over to keep lifting Chinese stocks. An official crackdown on margin financing and additions to the list of shortable Chinese stocks had a negative impact in late April. But it lasted one day before investors realized that the regulatory move was having an beneficial effect overall on the market. Investors also realized that the PBOC would continue to supply liquidity through RRR and rate cuts which would otherwise be drained by capital outflows, e.g. through outward portfolio investments via Stock Connect. The bottom line is that there’s no inflation to speak of in the system and the PBOC is still free to keep liquidity at ample levels.



Categories: Asia Unhedged

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