Asia: Chinese manufacturing PMIs boost sentiment

Encouraging data from the Chinese manufacturing industry pepped up most Asian markets, although Japan and India were both dragged lower in sympathy with Wall Street.

The Shanghai composite index closed 0.87% higher after better than expected data from HSBC's Chinese manufacturing purchasing managers index (PMI) survey for September.

The PMI flash reading of 50.5 was comfortably ahead of consensus of 50.0, which marks the dividing line between expansion and contraction, and the August reading of 50.2.

The underlying details of the report were a bit more mixed though, pointed out Deutsche Bank.

Both new orders and output stayed in expansionary territory but "the shine was somewhat offset" by declines in input prices, output prices and employment.

"Even though the headline number was a welcome surprise, scope for celebration is likely to be limited," added Rabobank as five-year lows for factory employment figures suggest that nervousness about the economic health of China is "unlikely to subside".

RBS markets and policymakers took the news as "a modicum of comfort", with the short-term outlook for organic growth "modest but not alarming".

Deutsche also pointed out that appetite for Chinese risk assets was also supported by news that major Chinese banks may ease mortgage lending restrictions in order to support the housing market.

Chinese media outlet 21st Century Business reported that the criteria for first home buyers’ loans may be eased and existing home owners who have paid outstanding mortgages may be considered available for first home status.

Chinese interbank money market conditions also continue to ease, with the seven-day interbank repo rate falling 13 basis points (bps) overnight to 3.09%, which is over 200 bps off the recent highs in July.

The central bank's move to inject 500bn yuan (£50bn) into the top five Chinese banks, which should be approved on Wednesday, as part of its ongoing strategy to move loans from the shadow banking sector into the official banking channel appears to be gaining traction.

Slower growth in shadow deposits, in fact non-principal-guaranteed wealth management products, has been seen in recent months, with China's 'big four' banks' 2.96trn yuan ($482bn) of these products being only 5% more than at the end of last year, according to Nikkei's Asian Review.

"Individuals have been noticeably shifting their money out of wealth management products and into listed stocks," strategist Chen Li of UBS said.

Barings Asset Management's David Stevenson welcomed the recent liquidity injection.

"China has received a lot of criticism from across the globe regarding the threat of slowing economic growth relative to the record growth rate it’s experienced over the past two decades, but in the same breath to also move the economy to a more sustainable consumption led model – the two don’t necessarily go hand-in-hand in the short term as there are frictional losses to growth as you transition any economy.

"In our view the government continues to manage this transition in a highly controlled and committed manner through various initiatives including the recent liquidity boost. We view this as part of the government’s economic reform plans for sustainable growth rather than a sign of distress."