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Why China's manufacturing report was 'plainly awful'

Societe Generale's Wei Yao on why it's bad and about to get worse.

China manufacturing report 2012 8 23Enlarge
A machinist uses an industrial saw to cut a steel bar at a workshop Shanghai. China's manufacturing activity fell to a nine-month low in August as firms struggled with global woes, providing further impetus for Beijing to beef up economic stimulus efforts, according to HSBC. (Peter Parks/AFP/Getty Images)

After climbing to a five-month high in July, China's HSBC Flash PMI fell to 47.5 in August. And a look at the sub-indices didn't offer any rays of hope either.

A look at this report prompted Societe Generale's Wei Yao to write, "This flash report is plainly awful." The export-orders fell to 44.7 in August, a level last seen during the Lehman crisis. The production index "fell below the boom-bust line" to 47.9.

And this doesn't bode well for the official PMI number which will be announced on Sept. 1. "The official manufacturing PMI recorded a notable drop in either the same month or the following month almost every time the HSBC PMI declined by more than 1 point. This time is probably going to be the same."

Yao expects the official number to fall to 49.7, and thinks the government's easing so far hasn't been able to combat the decline in external demand and "shock-waves from the housing sector correction."

Despite recent reports that a reserve requirement ratio cut would be unlikely, given the central bank's record reverse repurchase that is equivalent to a 35-40 basis points RRR cut, Yao writes that policymakers can "no longer sit on the sideline." She expects more interest rate cuts and sees "every reason to cut the RRR."

Meanwhile, Bank of America's Ting Lu expects the Chinese government to increase policy easing or stimulus.

"Policy easing was constrained in July and August as policymakers have been increasingly sensitive to rebounding home prices amid the leadership transition. However, with the conclusion of Beidaihe meeting in which top politicians tried to reach the agreement on the composition of the next standing committee of CCP’s politburo and with the trial of the wife of the disgraced Bo Xilai, politics will gradually take a back seat and economic policymaking will take the center stage again. "

Lu also expects two more 25 basis points interest rate cuts and three 50 basis point RRR cuts. One he thinks is "imminent."

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