Tuesday, November 1, 2011

China PMI Points to Soft Landing; Inflation Still Key

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Despite China's weaker than expected manufacturing data for October which is fanning concerns about the country's slowing growth, analysts say the data suggests that the economy remains very much in policymakers' control and is headed for a soft landing.

The official Purchasing and Manufacturing Index (PMI), which gathers information from the country's biggest manufacturers, came in at 50.4 for October, missing markets' forecast of 51.6 and dipping from September's reading of 51.2.

"We're definitely of the view that China is successfully engineering a soft landing, at the moment, given IPs (industrial production) still running at above 13-14 percent, and the fact that the PMI [is] returning back to a positive, above 50 territory. We do think that actual risks of China heading towards a hard landing are limited," Donna Kwok, Greater China Economist at HSBC told CNBC on Tuesday.

A separate PMI compiled by HSBC, which focuses on the small and medium-sized enterprises, came in at 51.0, a solid rebound from the 49.9 recorded in September. A reading above 50 indicates expansion while a figure below 50 denotes contraction.

"Finally, smaller players in China's manufacturing sectors are starting to see the benefits of the government's recent selective easing policy," said Kwok. "This policy includes both more favorable credit policies, directed at smaller to medium sized enterprises, and also as of last week, a new plan specifically targeting the service sectors, sector companies, with a lighter tax burden."

Brian Jackson, senior emerging markets strategist at Royal Bank of Canada (Hong Kong), notes that the lower official PMI number is understandable and "quite" consistent with the weaker external demand picture, particularly from Europe.

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