MNI China Business Sentiment Indicator drops 2.2% from a nine-month high in August

China’s largest companies have reported a softening in business conditions in August as a noticeable fall in demand and less favourable credit conditions outweighed a slight uptick in output, according to the latest MNI China Business Sentiment Survey.

The MNI China Business Sentiment Indicator, a gauge of current business sentiment, fell 2.2% to 54.3 in August from a nine-month high of 55.5 in July. While the indicator remained above the 50 breakeven level for the fifth consecutive month, it was the first drop in three months. The downward revision in current business conditions was accompanied by a deterioration in companies’ expectations for the future. The Future Expectations Indicator fell 6.7% to 55.8 in August, also the lowest outturn since May 2016.

There were mixed readings in key business metrics. While Production rose to the highest level since September 2015, there was a significant drop in New Orders. Firms were also less upbeat about the short-term outlook with both expectations indicators expanding at a significantly slower rate.

The less proactive monetary policy stance from the PBOC since the end of Q1 could be starting to have an impact. Between July and August, loans were less available and a few more companies reported higher credit costs, although on balance most panellists continued to report a decline. The Interest Rates Paid Indicator picked up sharply to 49.4, the highest since September 2015, while the Availability of Credit Indicator fell 4.3% to 52.9. Furthermore, the future expectations measures for both indicators suggest that companies expect tighter credit conditions.

Deflationary pressures intensified in August. The Prices Received Indicator fell further into contraction and firms in our panel also acknowledged a fall in prices for raw materials, with the Input Prices Indicator posting the lowest reading since April 2016.

On a positive note, the financial fortunes of firms improved slightly in August. The Financial Position Indicator moved back into expansion, increasing 1.6% to 50.4 in August. Firms also revised higher their forecast for their financial situation over the following three months.

Andy Wu, Senior Economist of MNI Indicators, shared:

Following some resilience since the end of the first quarter, the latest moderation in some of the key sub-indicators in our survey is a particular concern. Although the current balance of evidence suggests that Chinese firms have continued to withstand the headwinds facing the Chinese economy, the fact that companies are now less optimistic about future business conditions could be read as a warning sign that the growth momentum is likely to wane somewhat in the near term. Offsetting this, we believe the Chinese authorities will likely maintain an expansionary fiscal policy for the remainder of 2016.”

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