China’s flash manufacturing PMI rebounds to five-month high of 51.1 in October

What hard landing?

HSBC's headline flash PMI rebounds noticeably to a five month high of 51.1, marking a strong start for Chinese manufacturing activities in Q4. Inflation components within October's survey signal stabilizing output price growth and softening input price inflation. All of which confirm our view that there remains no risk of a hard landing in China.

Facts

Following three straight months of below 50-readings, October's flash manufacturing reading rebounded back into expansionary zone at a five-month high at 51.1 in October. This is driven by an across-the-board improvement in all five major components. In particular, the output sub-index jumped to a six-month high of 51.7 after having hovered around the 50 neutral-mark for the last four months.

This, in turn, was driven mainly driven by a 2.3ppt increase in new orders, which returned to above-50 territory for the first time in three months: 52.1 in October vs. September's 49.8 final reading. The exports orders sub-index also jumped to 52.4 after printing five consecutive months of below-50 readings.

Underlying momentum in Mainland manufacturing as measured by the new orders to inventory ratio moderated slightly to 2.7 from 3.0 in September. That said, this is still notably better than the readings of around 2 in Jul-Aug and negative 5 back in Sept-Oct 2008.

The labour market also remained stable as the employment sub-index edged up to 50 in October from 49.9 previously.

On the inflation front, input prices decelerated to a three month low of 54.3 from September's spike of 59.5. Output prices stayed relatively stable at 54.7 in October compared to 54.3 in September, although remained above the series' long term average of 53.4.

Implications
Today's flash PMI results confirms the strength of China's manufacturing growth despite the lagged impact of policy tightening and early signs of slowing external demand. This is in sharp contrast to the collapse that started from the autumn of 2008, so underpinning our view that risks of a hard landing remain remote. Coupled with targeted easing for small companies, this implies that stable labour market conditions and steady IP growth (likely at around 13% y-o-y) should continue in the coming months.

The jump in October's exports orders sub-index should help reduce fears of a near-term collapse in exports growth dragging China into a new recession. The slight positive surprises in recent US data points and still-resilient emerging market demand further support this outlook.

That said, the ongoing downturn in global trade cycle and uncertainties lingering over European policy-decision making will likely continue to weigh on China's exports for a while longer, as suggested by the continued slowdown in Taiwan's September exports orders. We expect exports to moderate further in the coming months from Septembers' 17% y-o-y, but a meltdown is not in sight.

Inflation pressures are easing. With growth still moderating, slower global commodities price and hence input price inflation should translate into a similar easing of output price inflationary pressures. Any easing, however, will be both sticky and gradual.

As such, we continue to expect monetary policy to remain stable in the coming months.

Bottom line: Hard-landing fears remain unwarranted. We expect IP growth to hover at around 13% and for monetary policy to be kept stable in the coming months.