China PMI slips further to 50.1

Good news industrial production is expected to inch up to 10.2%.

According to DBS, the PMI fell further to 50.1 in July from 50.2 in June and 51.3 in 2Q12, signaling continued weaknesses in both external and domestic demand. Given industrial production growth normally lags the PMI by about two months, it is projected to edge up to 10.2% YoY from 9.5% in June, but still substantially below 13.9% for 2011.

Here's more from DBS:

Poor industrial production growth is often a prelude to subdued export growth. Exports and imports are projected to grow 7.8% and 7.0% in July, down from 11.3% and 6.3% in June, resulting in a trade surplus of USD 33.6bn, up slightly from USD 31.7bn. The slight improvement in imports can be explained by stronger domestic demand driven by the fast-tracking of fiscal projects.

Recent monetary loosening alongside expansionary fiscal policies had revived fixed asset investment growth somewhat. Although headline FAI growth has continuously decelerated in the past three months from 20.9% (YTD) in March to 20.1% in May, it rebounded notably by 20.4% in June. With more new project approvals, FAI growth is set to accelerate to 20.6% in July. In fact, the new construction component of FAI has already charged up to 23.7% in June from 21.8% in May. On the consumption front, retail sales are will likely register 14.0% growth in July, up from 13.7% in June. A decade-long time series show that retail sales tend to be much more resilient against external shocks in spite of weakening exports.

As far as inflation is concerned, the CPI is projected to come in at 1.8%, after falling notably to 2.2% in June and from an average of 2.9% in 1Q12. By now, the readings would have treaded at or below 3.0% three months in a row. Yet, the risks of inflation (in the broader sense of the word, not just the CPI) should not be underestimated. Policymakers need to stay vigilant against potentially more quantitative easing by the Fed and EU as central bank officers have kept these options open. Meanwhile, M2 in July will likely advance 13.7%, which is still below the official target of 14%. New loans would likely be come in at around CNY 710.0bn versus CNY 919.8bn in June.

The economy will rebound mildly in 2H12 driven once again by investment spending. Other growth components, however, will likely to remain mute. The economy should have no problem to advance 8.2% this year with an annual inflation reading of 3.3%.