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Print[Ferro-alloys.com]We revise up our H2 GDP growth forecast largely as a result of the improvement in recent indicators including today's August flash HSBC PMI report. Specifically, we raise our Q3 GDP growth forecast to 7.7% yoy from the previous 7.5%, and raise our Q4 forecast to 7.8% from 7.7%. As a result of these changes, our H2 GDP growth is upgraded by 0.1ppt to 7.7% vs. market consensus of 7.5%. We maintain our 2014 GDP growth forecast of 8.5%, which is about 1ppt above the market consensus.
The recent pickup in growth momentum, which will likely continue in our view, benefited from the following changes in the last one and half months: 1) inventory restocking, which began in late July, driven by the recovery in prices of raw materials such as steel, coal, and copper; 2) the recovery in corporate confidence due to a slew of policy announcements is beginning to boost their incentive to investment. These policies include the tax exemptions for micro firms, the setting up of the Railway Development Fund to speed up railway construction, an increase in railway investment target for this year and the likely increases for coming few years, as well as a ambitious plan to invest in environmental and energy savings projects; 3) many real estate developers are beginning to increase land purchase and launch new projects due to strong pre-sales and a more accommodative policy environment. These real estate activities will likely help push up local government revenue and in term help support infrastructure spending in the remainder of this year and next year.
Today's HSBC flash PMI report is an additional confirmation of this recovery trend. It rose sharply to 50.1 in August from 47.7 in July, and is much higher than the consensus expectation of 48.2. As the official PMI in August tends to increase by an average of 0.4pts from July due to seasonality, we believe that the official PMI for August (to be released on September 1) will likely confirm this uptrend shown by the flash report. Given that August PMI is better than July, and assuming September PMI remains at the average of July-August, it means that IP growth in Q3 will likely reach 9.7% yoy, up from 9.1% in Q2. This acceleration in IP growth should easily add 0.2ppt to yoy GDP growth in Q3, from Q2's 7.5%.
Of the components of the PMI, the most visible improvement was seen in the sub-index of input price index, which was up by 6.3pts, suggesting that a restocking process is underway. Other sub-indices showing improvement were output price (+4.2pts), new orders (+3.9pts), output (+2.6pts), employment (+1.6pts), and raw material inventory (+1.9pts). Two sub-indexes saw moderate decreases were new export orders (-1.2pts) and finished goods inventory (-0.4pt).
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