Weekly Asia – China: economy gains traction / India’s rate hike

by: Maritza Cabezas

China

China’s official PMI rose in October, to 51.4 from 51.1 in September. The rise in the index was mainly explained by the production index, which increased by 1.5 ppts to 54.4. New orders, a forward looking component of the index, remains strong at 52.5. Export orders edged down by 0.3 ppts to 50.4. The strength of this index was mainly in the large enterprises (52.3), the PMI of medium sized enterprises was 50.2, while that of the small sized firms was 48.5. This suggests that small sized firms continue to face difficulties. This explains partly why the HSBC PMI is slightly weaker than the official PMI which was unchanged from the flash (50.9). The HSBC PMI focuses more on medium sized firms. In any case, both indicators suggest that growth has bottomed out. Finally, the October services PMI released yesterday surged to 56.3 from 55.4 the previous month. As the economic activity shows former footing, it will be easier for authorities to carry out the needed reforms, including measures to strengthen the financial system and a gradual lifting of  capital controls.

 

131104 - Asia Economy China

 India

In order to temper stubborn inflation, the Reserve Bank of India (RBI) has hiked the repo rate by another 25bp to 7.75% last week. This is the second rate hike in six weeks. At the same time, the central bank took measures to unwind the liquidity that had been tightened during the summer. It lowered the interest rate under the Marginal Standing Facility by 25bp to 8.75%. The RBI also reduced its GDP forecast to 5% from 5.5% in FY 2014. We expect GDP growth to reach 4.5%. The RBI also released the CPI forecasts for the first time, projecting inflation to reach 9% end March 2014. This suggests that inflation expectations remain high. Since the summer the current account deficit has improved and the volatility of the INR has decreased. But other indicators including September’s PMI (49.6) suggest that domestic demand remains extremely sluggish. Although authorities are facing the dilemma of low growth and high inflation, the central bank has proven to be firm in fighting inflation and therefore another rate hike is expected before the end of this year.

 

131104 - Asia Economy India