here in December linked the PMI pick-up to stronger real narrow money
growth in early 2019. With money trends deteriorating from Q2, the
suggestion was that the PMI would show renewed weakness in early 2020.
The November reading appears to have marked a peak, with the PMI
falling for a second month in January. The latest survey was conducted
before the disruptive effects of the nCoV epidemic were apparent: the
closing date was 22 January and the commentary does not make a link with
the weaker results.
The relationship with real narrow money momentum suggests that the
PMI was on course to continue to slide into mid-2020 – see chart. The
nCoV epidemic represents a joint demand and supply shock, hopefully
temporary, comparable with the 2001 terrorist attacks in the US. Based
on that episode, the PMI is likely to plunge in February but rebound
equally sharply once disruption starts to ease.
A key question is whether the crisis acts as a catalyst for more
forceful policy stimulus and a consequent pick-up in money growth to a
recovery-consistent level. The 10 bp cut in the PBoC’s reverse repo rate
announced today is double the prior reduction in November.
The view here has been that monetary weakness primarily reflects a
broken transmission mechanism rather than official reluctance to ease –
banks are unwilling to expand credit supply because of funding
difficulties, weak capital positions and uncertainty about borrower
creditworthiness against an uncertain economic backdrop. The nCoV
epidemic is likely to reinforce risk aversion. Successful stimulus may
depend on a combination of fiscal action and direct PBoC lending
supported by state-owned megabanks.