ECONOMIC OVERVIEW
Sturdy First Half Bumps Expectations
September 2017
Chinese economic activity has been solid heading further into the second half of 2017. August PMI data was stronger suggesting the manufacturing sector maintained strength. Activity was buoyed by a year-long construction surge, solid retail figures and a rise in exports. The continuing fall of the US currency is an encouraging factor for China and could boost export-oriented sectors in the September quarter. Market tensions soared as North Korea launched a missile over Japan on the 29th of August, with markets expected to closely scrutinize the actions of the US President over the coming months.

China’s Purchasing Manager Index (PMI) reports in early August were mixed. Large state-owned manufacturers performed well with the official PMI jumping to 51.7, from 51.4 in July, despite market expectations of softer data. The small to medium company focused Caixin PMI rose to a five-month high in August of 51.6 although market expectations pointed to a decline for August. China’s industrial production increased in July year on year but was down from the yearly high experienced in June. The inflation rate declined slightly to a three-month-low but is still beneath the government’s overall target for 2017 of 3.0%. Economic conditions are expected to pick up in September after the better-than-expected PMI data. The housing market remains robust with housing sales climbing from the previous year. Measures intended to deflate the current house price bubble have had limited impact. 

The economic landscape for the US and Germany is mixed. Doubts that the US Administration can implement its economic and tax reforms continues to impact business and consumer confidence. Activity this August in the US manufacturing sector has steered towards a decline in the PMI. Although flash estimates for August were revised up to 52.8, from 52.5, results were still below the 53.3 registered in July. US residential construction starts dropped in July, but the house price index managed a slight increase. Jobs data was soft in August performing below market expectations. German manufacturing activity is rebounding to the multi-year highs experienced in May and June, after easing in July. Currency trends are pointing to the Euro maintaining two-and-a-half year highs against the US dollar, putting pressure on short-term domestic and export demand growth. 

The Chinese Yuan reached twelve-month highs against the greenback in August after the government’s ‘counter-cyclical factor’, a policy introduced in May, has been driving market expectations for a stronger Yuan. Meanwhile the US dollar slumped, reaching lows not experienced since January 2015 but revived following better-than-expected GDP growth for the June quarter. Positive data has also bumped the Dow Jones heading into September, despite investor concerns after North Korea’s late August missile launch. Investors maintained a positive outlook in China with the Shanghai Composite surging in August to the highest level since January 2016.