China: Manufacturing Rebound Strengthens

Econintersect:  The official PMI (Purchasing Managers’ Index) for China registered a gain to 51 in August.  It had been 50.3 in July.  A second PMI published by Markit and HSBC also gave a reading that indicated expansion of manufacturing.  HSBC reading of 50.1 was up sharply from July which saw 47.7, an 11-month low.  The surge by the HSBC value ended three months of divergence between the two PMI surveys.  Both PMIs were stronger than expected, with the official PMI registering a 16-month high.

Click on graph for larger image.

The two surveys cover different segments of Chinese manufacturing.  The official survey collects data from the larger companies in the country, many of them SOEs (state operated enterprises), while HSBC samples smaller and midsized companies, mostly owned in the private sector.  The official survey is a better reflection of the domestic economy and HSBC data is more sensitive to export activity.

In the official PMI results a particularly strong area was new orders (52.4 in August up from 50.6 in July).  This encourages an expectation for further manufacturing growth in coming months.

Commenting on the China Manufacturing PMI^TM HSBC survey, Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC said:

“The final reading of August’s HSBC China Manufacturing PMI recovered to 50.1, from an 11-month low of 47.7 in July. This implies that growth in China’s manufacturing sector has started to stabilise on the back of a modest rebound of new orders and output.   This was mainly driven by the initial filtering through of recent stimulus measures and companies’ restocking activities. We expect some upside surprises to China’s growth in the coming months.”

The following is the Markit press release on the HSBC PMI:

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index^TM (PMI^TM) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 50.1 in August, signalling that operating conditions were relatively unchanged from the previous month. This was up from an 11-month low of 47.7 in July, and ended a three-month period of deterioration.

Chinese manufacturers signalled the first expansion of output in three months in August amid signs of improved market conditions. That said, the rate of growth was only slight. Behind the expansion of output, total new orders also increased, albeit marginally, and for the first time since April. Meanwhile, new export orders declined for the fifth consecutive month, and at a slightly quicker pace than that recorded in July. Weak client demand in Europe and the US was said to be behind the latest reduction in new business from abroad.

Higher volumes of new work led to the fastest accumulation of work-in-hand (but not yet completed) in two years. Furthermore, nearly one-in-ten respondents noted an increased amount of outstanding business.  Employment levels meanwhile decreased for the fifth successive month in August. However, the rate of job shedding was the weakest in four months, and only marginal.

Average input costs increased for the first time since February. The rate of input price inflation was only modest, however, and slower than the series average. Inflation was generally attributed to higher raw material prices.

Manufacturers only partially passed on their increased costs to clients, raising their output charges marginally in August. Nonetheless, it was the first time in six months that average tariffs had been raised.

Purchasing activity rose for the first time since April, and at a modest pace. According to anecdotal evidence, input buying increased as a result of higher production requirements, which stemmed from new order growth. Stocks of purchases meanwhile declined for the seventh month in a row and at a moderate pace.

Finally, stocks of post-production goods fell for the second month in a row, albeit only slightly. Stronger than expected sales were said to have depleted stocks in the latest survey period.

John Lounsbury

Sources:

• HSBC Purchasing Managers’ Index™ (Press Release, Markit, 02 September 2013)

• China official PMI hits 16-month high in August (Aileen Wang and Jonathan Standing, Reuters, 31 August 2013)

• China: Conflicted PMI Reports (GEI News, 01 August 2013)