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How To Read China's March PMI And When Will Be The Bottom For China's GDP

CFLP China MFG in March turns out much stronger than the market had expected. This official PMI is consistent with SWS' own sector survey index in March. Our sector survey lately found improvement in sales of home appliances and machine tools. Compared to our survey in mid March, sentiment of our respondents also improved for both current economic climate and future economic sentiment. We do our survey twice a month to track change in economic activities and sentiments.

Based on these anecdotal evidences, there is good chance that real GDP Y/Y in Q1 hits above 8.5% on back of increased fiscal spending. There is also decent chance that real GDP Y/Y in Q2 will be slightly higher than in Q1. Moreover, Bloomberg reported that Nomura and Morgan Stanley raised their expectation for Y2012 China GDP Y/Y to 9.0% from 8.4%.

When will be the bottom? It depends on what metric you use to evaluate the bottom, namely the real GDP Q/Q, the real GDP Y/Y or the nominal GDP Y/Y. Typically the turning point of real GDP Q/Q leads that of real GDP Y/Y, and turning point of real GDP Y/Y leads that of nominal GDP Y/Y. Based on the official data, we may have seen the turning point for real GDP Q/Q in 4Q11, and we are on track to see the turning point for real GDP Y/Y in 2Q12, and possibly will see the turning point for nominal GDP Y/Y in 3Q12. For most enterprises, the nominal GDP may be more important than the real GDP, since the earning data are all nominal.

Policy implication is that we are not likely to see a benchmark interest cut at this stage, even an asymmetric rate cut. RRR cut decision is possible. The major risks are still a substantial contraction in home sales volume, and as well as the deterioration in the external demands.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.