China’s PMI contracts further, fuels expectations of government stimulus (Part 1)

After a third month falling below the 50 point neutral line, investors are starting to price in government intervention

The Purchasing Managers Index (PMI) is a market-moving datapoint in several markets around the world. In the case of China, the “Flash” version of the PMI is a preview of the data due at the end of the month, based on 85% to 90% of the sample. While the official PMI may be adjusted later, the Flash PMI is not only accurate but also the relevant market-moving datapoint.

China&#8217;s PMI contracts further, fuels expectations of government stimulus (Part 1)

Market reacts to negative data by pricing in stimulus

The iShares FTSE/Xinhua China 25 (FXI) jumped 2.3% after the China Flash PMI was released for July. China’s slowdown has reached the point where bad news is good news, with investors expecting the government to stimulate the economy via monetary stimulus to keep on the 7.5% year-end target.

Chinese Premier Li Keqiang had previously stated that the target for 2013 GDP growth remains at 7.5%. The latest GDP estimate came in at 7.5%, which was at the higher end of the 7.0% to 7.5% consensus, and it brought skepticism about the feasibility of the target through year-end.

PMI hits nine-month low

The Flash PMI for July posted 47.7—down from the 48.2 in June, marking the fourth decline in a row.

Read on for the details on the report in Part 2.

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