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FLASH NOTE Flash Note China: June PMI Manufacturing activity declines slightly, but nonmanufacturing activity rises on strong construction Pictet Wealth Management - Asset Allocation & Macro Research | 4 July 2016 Manufacturing PMIs declined in June, while non-manufacturing PMI rose thanks to strong construction activity. The PMI figures show activity at large companies much stronger than for smaller companies. While the growth in construction activity remained strong in June, it may well drop in the coming months as government stimulus eases. Overall, the June PMI readings are consistent with our forecast for 6.5% GDP growth in China this year. China’s official manufacturing purchasing managers’ index (PMI) declined slightly in June and stood right at the 50 threshold that separates expansion from contraction. The Caixin manufacturing PMI also fell in June from the previous month. The non-manufacturing PMI rose in June due to strong construction activity. We expect China’s economy to continue to muddle through for the rest of the year with the help of continued government support. We maintain our forecast of 6.5% GDP growth for 2016. Manufacturing activity may slow down after a few months recovery China’s official manufacturing PMI, complied by the National Bureau of Statistics (NBS) and the China Federation of Logistics and Purchasing, dropped slightly to 50 in June from 50.1 in May. The June Caixin PMI declined to 48.6 from 49.2 the previous month. While the output sub-index of the official PMI continues to be strong (52.5 in June vs. 52.3 in May), the indices for new orders (50.5 in June vs. 50.7 in May) and new export orders (49.6 in June vs. 50 in May) have been declining. This suggests that manufacturing activity may slow down in the coming months after recovering in March through May. INDEX OFFICIAL MANUFACTURING PMI 58 CAIXIN MANUFACTURING PMI 56 50 THRESHOLD 54 CONTACT Dong CHEN dochen @pictet.com +852 3191 1932 Pictet Group Route des Acacias 60 CH - 1211 Geneva 73 www.pictet.com 52 50 48 46 2010 Source: W ind 2011 2012 2013 2014 2015 2016 The divergence in activity between large companies and SMEs indicates a tougher environment for the private sector The official survey shows that large enterprises are doing significantly better than medium and small enterprises (SMEs). PMI for large enterprises rose by 0.7 points to 51 in June. By contrast, the PMI for medium-sized enterprises dropped by 1.4 points to 49.1 and that for small enterprises by 1.2 points to 47.4. This divergence is consistent with the discrepancy observed between the official PMI, whose sample covers more large state-owned enterprises (SOEs), and the Caixin PMI, whose coverage tilts towards private-sector SMEs. The underperformance of SMEs reflects the tougher environment that the private sector currently faces, which is also illustrated by the much weaker growth in fixed asset investment in the private-sector in recent months. CHART 2: CHINA MANUFACTURING PMI BY TYPE OF ENTERPRISE INDEX 56 54 LARGE ENTERPRISES MEDIUM-SIZED ENTERPRISES SMALL ENTERPRISES 50 THRESHOLD 52 50 48 46 44 2012 2013 2014 2015 2016 Source: W ind Non-manufacturing PMI rose on strong construction activities China’s growth recovery in the first half of 2016 was largely the result of the monetary and fiscal stimulus by the government that started late last year and that was reflected in strong construction activity in both the infrastructure and the property sectors. The latest non-manufacturing PMI indicates that momentum in construction remains strong for the moment. However, there are clear signs that government stimulus eased off in the second quarter. Bank lending and total social financing (TSF) have both seen their growth rate drop quite noticeably compared to Q1. The property market has also cooled a bit in recent months. As a consequence, while it is still strong, construction activity may ease somewhat in the coming months. 4 July 2016 | FLASH NOTE – Chinese PMI | PAGE 2 Overall, the June PMI readings are consistent with our expectation of China’s near-term growth trajectory. The economy will likely continue to muddle through for the rest of the year with support from the government so that we are maintaining our forecast of 6.5% of real GDP growth for China in 2016. CHART 3: CHINA NON-MANUFACTURING PMI INDEX 66 NON-MANUFACTURING PMI: CONSTRUCTION 64 62 60 58 56 54 52 50 2012 2013 2014 2015 2016 Source: W ind 4 July 2016 | FLASH NOTE – Chinese PMI | PAGE 3