PMIs point to stability in early 2017, but risks still lurk beneath the surface

China's PMI declined modestly but remained in expansion territory at 51.6 for the month of February. Despite economic risks on the horizon - namely a massive corporate debt load, weakening house prices, and possible trade wars in the cards - PMI numbers indicate that the waters remain calm for now. Employment PMI remains stable. Construction seems to have improved despite the dramatic slowing of monthly housing prices.  Tier one cities saw a drop in monthly house in January. Most of the expansion remains domestically driven. But, growth still rests on the shoulders of large enterprises, most likely state-affiliated. Small and mid-sized firms continue to struggle.  Large state-affiliated firms remain the most important source of investment.

All-in-all, prospects look stable early into 2017.  But, problems going into 2017 lurk below the surface.  Decelerating housing prices, a rising corporate debt burden, slowing investment, outflow concerns, and a potential trade war on the horizon all pose serious risks to growth.  I expect any disruption to the recent stable economy will be met with a sizeable policy response this year with an important leadership reshuffle taking place in November.  2018 might be the year when the risks unfold.

Here are some key numbers within the Feb 2017 PMI data:

  • Construction PMI was up 0.9 points from last month to 57.1. 
  • Non-manufacturing business expectations rose to 62.4, the highest reading over the last year.
  • Large enterprises had a PMI of 53.3.  Medium-sized firms were above the contraction level with a 50.5 PMI.  Small firms remain in contraction at 46.4
  • Manufacturing new orders remained relatively unchanged from the readings of the last five months at 53.2.  New orders point to another month of stability.
  • Service employment PMI remained modestly below contraction at 49.7, which is probably not low enough yet to cause concern among policymakers.  Service employment is the primary source of stability as China's old economy sectors falter. 

PMI Data (select category on legend to see plot)