China’s May PMI new orders fell to 48.7 signaling further slowdown but, according to Credit Suisse, one should be even more concerned about the deterioration in the money supply data. According to the swiss bank, the HSBC PMI is consistent with 8% GDP, but recent trends in the money supply are consistent with weaker growth. Here is an excerpt of what their research team has told clients:
“Deposit growth is at series-low, threatening a higher real cost of deposits (to stop capital outflows from China and to raise deposits) and a higher real cost of capital. As the real cost of capital rises, the investment share of GDP is likely to peak (in the case of Japan and Korea, GDP growth slowed significantly in the decade after the investment share of GDP peaked);
The ratio of M1 to M2 growth points to much weaker growth (below). New loans were only Rmb682bn in April after an average of Rmb820bn in Q1, despite many signs that the authorities were easing policy in April.
Other concerns: (a) the latest IP, M2 and electricity output data are consistent with 7% GDP growth (although 3-month averages are less weak); (b) major stimulus might only occur once government officials have been given their new positions (and with a possible fall in rural to urban migration, the political leadership will be aiming at only 7% GDP as in the 12th 5 yr plan); (c) house prices, we believe, could fall more than another 10% (they are still high and 15% of the stock is vacant); (d) falling producer prices are pointing to a margin squeeze; (e) consensus has a narrow range of forecasts for GDP in 2013 (7.5–9%).
… these trends are worrying and need to be monitored carefully.
We stick to our underweight of NJA-exposed capital goods stocks (Volvo, Kone, SKF) – and we are strategically short of mining …”
Source: Credit Suisse