China SMEI: Sentiment improved modestly in October – Standard Chartered

SMEI returned to expansionary territory at 50.7 in October, after staying below 50 for two months. Overall performance sub-index edged up to 50.2, the first above 50-reading since May. Manufacturing continued to outperform; real estate, construction and retail sales remained key drags. Easing monetary policy supported SME access to bank credit; funding costs from NBFIs fell further, Standard Chartered’s Hunter Chan and Shuang Ding note.

Demand outlook improved

“Our proprietary Small and Medium Enterprise Confidence Index (SMEI; Bloomberg: SCCNSMEI <Index>) edged up to 50.7 in October from 49.7 in September, leaving contractionary territory after two months on a broad-based improvement in the three key sub-indices. The performance sub-index rose to 50.2 in October from 48.9, ending four straight months of contraction. While sales remained subdued, the new orders, employment and profitability sub-indices bounced to above-50 levels. The expectations sub-index recovered to 50.3 from 49.6 prior.” 

“While production activity declined m/m partly due to the National Day holidays, the manufacturing performance sub-index picked up on a solid increase in new orders. External demand remained robust. Cross-border trading SMEs reported a recovery in sales and higher new orders. Meanwhile, non-manufacturing performance remained soft, with real estate, construction, retail sales and wholesale, and other services SMEs continuing to report a m/m decline in overall activity.” 

“The credit sub-index climbed to a five-month high of 51.7 in October, as banks were more willing to lend to SMEs. The People’s Bank of China (PBoC) lowered its policy rate and reserve requirement ratio (RRR) in late September. In addition, borrowing costs from non-bank financial institutions (NBFIs) fell for a second month. Expectations of CNY appreciation against the USD picked up again among SMEs.”