China's reflation story (on the back of a record amount of debt created last year) was put on display on Friday morning when both the Chinese manufacturing and non-manufacturing PMI rose more than expected, with the Manufacturing PMI rising to a level not seen since April 2012. According to the NBS, China's Mfg PMI rose from 51.6 to 51.8 in March, the highest in almost five years, and above the 51.7 consensus estimate, while the non-manufacturing PMI also jumped, rising from 54.2 to 55.1, the highest in two years.
The National Bureau of Statistics reported that New Orders rose from 53.0 to 53.3 while new export orders rose to 51, the highest since early 2012. Broken by firm size, the state-measured PMI showed largest enterprises were the strongest at 53.3, followed by medium-sized companies, while small firms remained in contraction at 48.6. Perhaps the most notable internal metric was the employment index, which hit the 50 level for the first time since May 2012, marking the first time the manufacturing sector has not lost jobs in nearly 5 years.
As the chart below shows, the catalyst for the move higher has been the recent surge in producer prices, which have soared as much as 7% Y/Y on the back of soaring commodity prices; both have since peaked and it is expected that in the coming months, China's inflationary pressures will subside especially given the recent efforst by Beijing to reign in out of control credit, especially shadow, issuance.
A subindex for construction activity rose in March for the first time since the start of the year, hitting 60.5. As a reminder, and as Deutsche Bank explained two weeks ago, the only thing that matters for both China, and the rest of the world, is making sure China's housing bubble, as explained in "Why The Fate Of The World Economy Is In The Hands Of China's Housing Bubble," does not burst.
"The first quarter is off to a good start," said Wang Qiufeng, an analyst at China Chengxin International Credit Rating in Beijing, quoted by Bloomberg. "The upbeat momentum may last through the first half of this year, as the government is pushing investment."
“The fact that the real strength is with the non-manufacturing PMI suggests that there’s fundamentally a good story going on here,” said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “Manufacturing is where you’d expect to see the effects of stimulus showing up.”
So is China worried by the potential inflationary signals carried by today's PMI prints? Oh yes, which is why the PBOC did not conduct a reverse repo liquidity injection for the sixth consecutive day, saying in a statement that the liquidity level if "relatively high" despite traditional month-end liquidity demands; as a result in the past 6 days, the PBOC has now drained some 320 billion yuan from the banking system.
In recent days this has led to a sharp move higher in various repo tenors, most notably the benchmark 7-Day repo, which on Thursday fell w bps to 2.81%, but has jumped sharply in the past week as interbank funding problems have emerged, leading to the biggest drop in months in the Shanghai composite index overnight. Keep an eye on the the repo market in Friday's session for any acute liquidity shortages, especially since China's onshore market is closed on Monday and Tuesday.