Forex Investment and Currency Trading

China’s July PMI readings suggests an increased pace of expansion in manufacturing activity and rising cost pressures, likely related to increases in raw material prices. Market view is that a growth recovery in China that will be sustained in H2 09 and 2010, as well as increasing inflation concerns down the road, arising mainly from cost pressures. Some analysts believe that a gentle shift in the monetary policy stance is under way.

The first batch of the July data, three leading indicators (PMIs and the MNI Business Sentiment), are all significantly above the benchmark 50 level, pointing to continued expansion in manufacturing and business activity. The NBS-CFLP PMI stayed at around 53 for the fourth straight month, edging up to 53.3 from 53.2 in June. The CLSA PMI rose further to a 12-month high of 52.8 from 51.8, and the MNI current business conditions index improved to 57.4 from 56.7. This reinforces the view that China’s growth recovery is gaining momentum.

In details, the PMI components point to a domestic-demand-driven recovery in manufacturing activity and, on a sequential basis, inflation concerns owing mainly to cost pressures. The new orders component of PMIs are both above 55, with the CLSA new orders index rising to a 13-month high of 55.9, while that for the NBS PMI was steady at 55.5. The new export orders index rose moderately, but stayed well below the overall new orders indices, suggesting that domestic demand is behind most of the improvement in new orders. Specifically, the export orders index for the NBS PMI rose to a 14-month high of 52.1 from 51.4 in June, while the CLSA new export orders index edged down to 50.2 from 50.9 in June, although it remained above 50 for the second month consecutive month.

It is notable that employment indexes have improved for both PMIs, increasing to 50.8 from 50.1 in June for the NBS and 51.0 from 50.2 for the CLSA, readings that were in line with anecdotal evidence of an improving employment situation in China. Meanwhile, owing to rising cost pressures related to increases in commodity prices, both indexes measuring input prices rose significantly. The NBS sub-component rose to a one-year high of 59.9, while that for the CLSA surged to an 11-month high of 59.1, up from 49.8 a month earlier.