Rise in China's PMI Could Allow for a Firmer Monetary Stance

China's official manufacturing PMI rose from 51.1 in September to 51.4 in October, a 17-month high, beating the Bloomberg consensus expectation of 51.2.


Looking at the components, the largest change was a rise of 1.5 points in the production component to 54.4.


The new order index, which gauges both domestic orders and export orders, edged down to a still robust 52.5 in October. The new export order index remained substantially lower, easing to 50.4, reflecting still challenging global demand conditions. On the other hand, The Royal Bank of Scotland's "new domestic orders index," estimated using the two new order indices, remained above 53, pointing to healthy domestic demand momentum, even as it eased slightly from September.


After having risen sharply mid-year, the purchasing price component fell to a still high 53.3 in October. This is in line with our view that factory gate prices are now moving towards stability, after pronounced decline in the PPI in the last 18 months.


In the meantime, the Markit-HSBC PMI also came in fairly strong 50 at 50.9. This PMI tends to pick up sentiment in smaller, privately-owed and export-oriented companies.


RBS says the PMI data is in line with the bank's relatively benign growth outlook.


"With global demand momentum likely to gradually pick up as the economic upturn in the US and Europe continues and, importantly, domestic demand momentum remaining solid, we expect GDP growth to exceed the government's "bottom line" in the coming quarters, thus alleviating pressures to stimulate the economy. Specifically, we expect GDP growth of 7.7% yoy in Q4 and 8.2% in H1 2014. In terms of whole-year numbers, we project around 7.7% GDP growth in 2013 and 8.2% in 2014," says the RBS.


The RBS maintains that with a sufficiently constructive growth outlook and rapid housing price increases, monetary policy will be relatively firm in the coming quarters.


The bank notes that a key motivation for a firmer monetary stance is to slow down credit growth amidst worries about financial risks.